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Ohio 1040ez Instructions

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Ohio 1040ez Instructions

Ohio 1040ez instructions 4. Ohio 1040ez instructions   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Ohio 1040ez instructions Payments from checking accounts. Ohio 1040ez instructions Amounts paid within 30 days. Ohio 1040ez instructions Optional method for determining date of reallocation. Ohio 1040ez instructions Interest on a segregated account. Ohio 1040ez instructions How to report. Ohio 1040ez instructions Interest You Can DeductStatement. Ohio 1040ez instructions Expenses paid to obtain a mortgage. Ohio 1040ez instructions Prepayment penalty. Ohio 1040ez instructions De minimis OID. Ohio 1040ez instructions Constant-yield method. Ohio 1040ez instructions Loan or mortgage ends. Ohio 1040ez instructions Interest You Cannot DeductPenalties. Ohio 1040ez instructions Who is a key person? Exceptions for pre-June 1997 contracts. Ohio 1040ez instructions Interest allocated to unborrowed policy cash value. Ohio 1040ez instructions Capitalization of Interest When To Deduct InterestPrepaid interest. Ohio 1040ez instructions Discounted loan. Ohio 1040ez instructions Refunds of interest. Ohio 1040ez instructions Prepaid interest. Ohio 1040ez instructions Discounted loan. Ohio 1040ez instructions Tax deficiency. Ohio 1040ez instructions Related person. Ohio 1040ez instructions Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Ohio 1040ez instructions Introduction This chapter discusses the tax treatment of business interest expense. Ohio 1040ez instructions Business interest expense is an amount charged for the use of money you borrowed for business activities. Ohio 1040ez instructions Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Ohio 1040ez instructions Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Ohio 1040ez instructions 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Ohio 1040ez instructions Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Ohio 1040ez instructions If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Ohio 1040ez instructions Allocate your interest expense to the following categories. Ohio 1040ez instructions Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Ohio 1040ez instructions You allocate loan proceeds by tracing disbursements to specific uses. Ohio 1040ez instructions The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Ohio 1040ez instructions Secured loan. Ohio 1040ez instructions   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Ohio 1040ez instructions Example. Ohio 1040ez instructions You secure a loan with property used in your business. Ohio 1040ez instructions You use the loan proceeds to buy an automobile for personal use. Ohio 1040ez instructions You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Ohio 1040ez instructions    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Ohio 1040ez instructions The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Ohio 1040ez instructions For more information, see Publication 936. Ohio 1040ez instructions Allocation period. Ohio 1040ez instructions   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Ohio 1040ez instructions The date the loan is repaid. Ohio 1040ez instructions The date the loan is reallocated to another use. Ohio 1040ez instructions Proceeds not disbursed to borrower. Ohio 1040ez instructions   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Ohio 1040ez instructions This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Ohio 1040ez instructions Proceeds deposited in borrower's account. Ohio 1040ez instructions   Treat loan proceeds deposited in an account as property held for investment. Ohio 1040ez instructions It does not matter whether the account pays interest. Ohio 1040ez instructions Any interest you pay on the loan is investment interest expense. Ohio 1040ez instructions If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Ohio 1040ez instructions Example. Ohio 1040ez instructions Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Ohio 1040ez instructions No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Ohio 1040ez instructions On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Ohio 1040ez instructions On September 4, Celina uses an additional $40,000 from the account for personal purposes. Ohio 1040ez instructions Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Ohio 1040ez instructions From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Ohio 1040ez instructions From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Ohio 1040ez instructions Order of funds spent. Ohio 1040ez instructions   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Ohio 1040ez instructions Any unborrowed amounts held in the same account. Ohio 1040ez instructions Any amounts deposited after these loan proceeds. Ohio 1040ez instructions Example. Ohio 1040ez instructions On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Ohio 1040ez instructions The following table shows the transactions in her account during the tax year. Ohio 1040ez instructions Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Ohio 1040ez instructions She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Ohio 1040ez instructions She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Ohio 1040ez instructions She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Ohio 1040ez instructions For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Ohio 1040ez instructions Payments from checking accounts. Ohio 1040ez instructions   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Ohio 1040ez instructions You can treat checks written on the same day as written in any order. Ohio 1040ez instructions Amounts paid within 30 days. Ohio 1040ez instructions   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Ohio 1040ez instructions This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Ohio 1040ez instructions   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Ohio 1040ez instructions If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Ohio 1040ez instructions   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Ohio 1040ez instructions Example. Ohio 1040ez instructions Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Ohio 1040ez instructions Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Ohio 1040ez instructions Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Ohio 1040ez instructions Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Ohio 1040ez instructions In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Ohio 1040ez instructions Optional method for determining date of reallocation. Ohio 1040ez instructions   You can use the following method to determine the date loan proceeds are reallocated to another use. Ohio 1040ez instructions You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Ohio 1040ez instructions The first day of that month. Ohio 1040ez instructions The date the loan proceeds are deposited in the account. Ohio 1040ez instructions However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Ohio 1040ez instructions Interest on a segregated account. Ohio 1040ez instructions   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Ohio 1040ez instructions When the interest earned is used up, any remaining payments are from loan proceeds. Ohio 1040ez instructions Example. Ohio 1040ez instructions You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Ohio 1040ez instructions When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Ohio 1040ez instructions You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Ohio 1040ez instructions All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Ohio 1040ez instructions The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Ohio 1040ez instructions The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Ohio 1040ez instructions Loan repayment. Ohio 1040ez instructions   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Ohio 1040ez instructions Personal use. Ohio 1040ez instructions Investments and passive activities (other than those included in (3)). Ohio 1040ez instructions Passive activities in connection with a rental real estate activity in which you actively participate. Ohio 1040ez instructions Former passive activities. Ohio 1040ez instructions Trade or business use and expenses for certain low-income housing projects. Ohio 1040ez instructions Line of credit (continuous borrowings). Ohio 1040ez instructions   The following rules apply if you have a line of credit or similar arrangement. Ohio 1040ez instructions Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Ohio 1040ez instructions Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Ohio 1040ez instructions Treat these loans as repaid in the order shown on the loan agreement. Ohio 1040ez instructions Loan refinancing. Ohio 1040ez instructions   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Ohio 1040ez instructions Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Ohio 1040ez instructions Debt-financed distribution. Ohio 1040ez instructions   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Ohio 1040ez instructions The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Ohio 1040ez instructions How to report. Ohio 1040ez instructions   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Ohio 1040ez instructions If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Ohio 1040ez instructions If the proceeds were used in an investment activity, enter the interest on Form 4952. Ohio 1040ez instructions If the proceeds are used for personal purposes, the interest is generally not deductible. Ohio 1040ez instructions Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Ohio 1040ez instructions Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Ohio 1040ez instructions It does not matter what type of property secures the loan. Ohio 1040ez instructions You can deduct interest on a debt only if you meet all the following requirements. Ohio 1040ez instructions You are legally liable for that debt. Ohio 1040ez instructions Both you and the lender intend that the debt be repaid. Ohio 1040ez instructions You and the lender have a true debtor-creditor relationship. Ohio 1040ez instructions Partial liability. Ohio 1040ez instructions   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Ohio 1040ez instructions Example. Ohio 1040ez instructions You and your brother borrow money. Ohio 1040ez instructions You are liable for 50% of the note. Ohio 1040ez instructions You use your half of the loan in your business, and you make one-half of the loan payments. Ohio 1040ez instructions You can deduct your half of the total interest payments as a business deduction. Ohio 1040ez instructions Mortgage. Ohio 1040ez instructions   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Ohio 1040ez instructions However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Ohio 1040ez instructions Statement. Ohio 1040ez instructions   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Ohio 1040ez instructions You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Ohio 1040ez instructions A governmental unit is a person for purposes of furnishing the statement. Ohio 1040ez instructions   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Ohio 1040ez instructions You cannot deduct this amount. Ohio 1040ez instructions For information on how to report this refund, see Refunds of interest, later in this chapter. Ohio 1040ez instructions Expenses paid to obtain a mortgage. Ohio 1040ez instructions   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Ohio 1040ez instructions These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Ohio 1040ez instructions If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Ohio 1040ez instructions Prepayment penalty. Ohio 1040ez instructions   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Ohio 1040ez instructions Interest on employment tax deficiency. Ohio 1040ez instructions   Interest charged on employment taxes assessed on your business is deductible. Ohio 1040ez instructions Original issue discount (OID). Ohio 1040ez instructions   OID is a form of interest. Ohio 1040ez instructions A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Ohio 1040ez instructions The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Ohio 1040ez instructions   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Ohio 1040ez instructions Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Ohio 1040ez instructions You generally deduct OID over the term of the loan. Ohio 1040ez instructions Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Ohio 1040ez instructions De minimis OID. Ohio 1040ez instructions   The OID is de minimis if it is less than one-fourth of 1% (. Ohio 1040ez instructions 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Ohio 1040ez instructions   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Ohio 1040ez instructions On a constant-yield basis over the term of the loan. Ohio 1040ez instructions On a straight-line basis over the term of the loan. Ohio 1040ez instructions In proportion to stated interest payments. Ohio 1040ez instructions In its entirety at maturity of the loan. Ohio 1040ez instructions You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Ohio 1040ez instructions Example. Ohio 1040ez instructions On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Ohio 1040ez instructions The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Ohio 1040ez instructions Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Ohio 1040ez instructions The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Ohio 1040ez instructions 0025 × 10). Ohio 1040ez instructions You choose to deduct the OID on a straight-line basis over the term of the loan. Ohio 1040ez instructions Beginning in 2013, you can deduct $150 each year for 10 years. Ohio 1040ez instructions Constant-yield method. Ohio 1040ez instructions   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Ohio 1040ez instructions You figure your deduction for the first year using the following steps. Ohio 1040ez instructions Determine the issue price of the loan. Ohio 1040ez instructions Generally, this equals the proceeds of the loan. Ohio 1040ez instructions If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Ohio 1040ez instructions Multiply the result in (1) by the yield to maturity. Ohio 1040ez instructions Subtract any qualified stated interest payments from the result in (2). Ohio 1040ez instructions This is the OID you can deduct in the first year. Ohio 1040ez instructions   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Ohio 1040ez instructions To get the adjusted issue price, add to the issue price any OID previously deducted. Ohio 1040ez instructions Then follow steps (2) and (3) above. Ohio 1040ez instructions   The yield to maturity is generally shown in the literature you receive from your lender. Ohio 1040ez instructions If you do not have this information, consult your lender or tax advisor. Ohio 1040ez instructions In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Ohio 1040ez instructions Example. Ohio 1040ez instructions The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Ohio 1040ez instructions The yield to maturity on your loan is 10. Ohio 1040ez instructions 2467%, compounded annually. Ohio 1040ez instructions For 2013, you can deduct $93 [($98,500 × . Ohio 1040ez instructions 102467) − $10,000]. Ohio 1040ez instructions For 2014, you can deduct $103 [($98,593 × . Ohio 1040ez instructions 102467) − $10,000]. Ohio 1040ez instructions Loan or mortgage ends. Ohio 1040ez instructions   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Ohio 1040ez instructions A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Ohio 1040ez instructions If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Ohio 1040ez instructions See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Ohio 1040ez instructions Points. Ohio 1040ez instructions   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Ohio 1040ez instructions These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Ohio 1040ez instructions If any of these charges (points) are solely for the use of money, they are interest. Ohio 1040ez instructions   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Ohio 1040ez instructions However, you can choose to fully deduct points in the year paid if you meet certain tests. Ohio 1040ez instructions For exceptions to the general rule, see Publication 936. Ohio 1040ez instructions The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Ohio 1040ez instructions Partial payments on a nontax debt. Ohio 1040ez instructions   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Ohio 1040ez instructions You can deduct only the interest. Ohio 1040ez instructions This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Ohio 1040ez instructions Installment purchase. Ohio 1040ez instructions   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Ohio 1040ez instructions If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Ohio 1040ez instructions The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Ohio 1040ez instructions For more information on installment sales and unstated interest, see Publication 537. Ohio 1040ez instructions Interest You Cannot Deduct Certain interest payments cannot be deducted. Ohio 1040ez instructions In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Ohio 1040ez instructions You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Ohio 1040ez instructions Interest paid with funds borrowed from original lender. Ohio 1040ez instructions   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Ohio 1040ez instructions You can deduct the interest expense once you start making payments on the new loan. Ohio 1040ez instructions   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Ohio 1040ez instructions All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Ohio 1040ez instructions Capitalized interest. Ohio 1040ez instructions   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Ohio 1040ez instructions See Capitalization of Interest, later. Ohio 1040ez instructions In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Ohio 1040ez instructions Add this interest to the basis of the property. Ohio 1040ez instructions Commitment fees or standby charges. Ohio 1040ez instructions   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Ohio 1040ez instructions You may be able to deduct them as business expenses. Ohio 1040ez instructions   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Ohio 1040ez instructions See Capitalization of Interest, later. Ohio 1040ez instructions Interest on income tax. Ohio 1040ez instructions   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Ohio 1040ez instructions Treat this interest as a business deduction only in figuring a net operating loss deduction. Ohio 1040ez instructions Penalties. Ohio 1040ez instructions   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Ohio 1040ez instructions You cannot deduct them. Ohio 1040ez instructions Generally, you cannot deduct any fines or penalties. Ohio 1040ez instructions Interest on loans with respect to life insurance policies. Ohio 1040ez instructions   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Ohio 1040ez instructions   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Ohio 1040ez instructions However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Ohio 1040ez instructions Who is a key person?   A key person is an officer or 20% owner. Ohio 1040ez instructions However, the number of individuals you can treat as key persons is limited to the greater of the following. Ohio 1040ez instructions Five individuals. Ohio 1040ez instructions The lesser of 5% of the total officers and employees of the company or 20 individuals. Ohio 1040ez instructions Exceptions for pre-June 1997 contracts. Ohio 1040ez instructions   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Ohio 1040ez instructions If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Ohio 1040ez instructions Interest allocated to unborrowed policy cash value. Ohio 1040ez instructions   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Ohio 1040ez instructions This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Ohio 1040ez instructions For more information, see section 264(f) of the Internal Revenue Code. Ohio 1040ez instructions Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Ohio 1040ez instructions The property must be produced by you for use in your trade or business or for sale to customers. Ohio 1040ez instructions You cannot capitalize interest related to property that you acquire in any other manner. Ohio 1040ez instructions Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Ohio 1040ez instructions Designated property is any of the following. Ohio 1040ez instructions Real property. Ohio 1040ez instructions Tangible personal property with a class life of 20 years or more. Ohio 1040ez instructions Tangible personal property with an estimated production period of more than 2 years. Ohio 1040ez instructions Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Ohio 1040ez instructions Property you produce. Ohio 1040ez instructions   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Ohio 1040ez instructions Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Ohio 1040ez instructions Carrying charges. Ohio 1040ez instructions   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Ohio 1040ez instructions You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Ohio 1040ez instructions For more information, see chapter 7. Ohio 1040ez instructions Capitalized interest. Ohio 1040ez instructions   Treat capitalized interest as a cost of the property produced. Ohio 1040ez instructions You recover your interest when you sell or use the property. Ohio 1040ez instructions If the property is inventory, recover capitalized interest through cost of goods sold. Ohio 1040ez instructions If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Ohio 1040ez instructions Partnerships and S corporations. Ohio 1040ez instructions   The interest capitalization rules are applied first at the partnership or S corporation level. Ohio 1040ez instructions The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Ohio 1040ez instructions   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Ohio 1040ez instructions You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Ohio 1040ez instructions To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Ohio 1040ez instructions Additional information. Ohio 1040ez instructions   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Ohio 1040ez instructions For more information, see sections 1. Ohio 1040ez instructions 263A-8 through 1. Ohio 1040ez instructions 263A-15 of the regulations and Notice 88-99. Ohio 1040ez instructions Notice 88-99 is in Cumulative Bulletin 1988-2. Ohio 1040ez instructions When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Ohio 1040ez instructions Cash method. Ohio 1040ez instructions   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Ohio 1040ez instructions You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Ohio 1040ez instructions Prepaid interest. Ohio 1040ez instructions   You generally cannot deduct any interest paid before the year it is due. Ohio 1040ez instructions Interest paid in advance can be deducted only in the tax year in which it is due. Ohio 1040ez instructions Discounted loan. Ohio 1040ez instructions   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Ohio 1040ez instructions For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Ohio 1040ez instructions Refunds of interest. Ohio 1040ez instructions   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Ohio 1040ez instructions If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Ohio 1040ez instructions Accrual method. Ohio 1040ez instructions   Under an accrual method, you can deduct only interest that has accrued during the tax year. Ohio 1040ez instructions Prepaid interest. Ohio 1040ez instructions   See Prepaid interest, earlier. Ohio 1040ez instructions Discounted loan. Ohio 1040ez instructions   See Discounted loan, earlier. Ohio 1040ez instructions Tax deficiency. Ohio 1040ez instructions   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Ohio 1040ez instructions If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Ohio 1040ez instructions   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Ohio 1040ez instructions Related person. Ohio 1040ez instructions   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Ohio 1040ez instructions The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Ohio 1040ez instructions See section 267 of the Internal Revenue Code for more information. Ohio 1040ez instructions Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Ohio 1040ez instructions See Treatment of gift and demand loans, later, in this discussion. Ohio 1040ez instructions A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Ohio 1040ez instructions A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Ohio 1040ez instructions A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Ohio 1040ez instructions An additional payment in an amount equal to the forgone interest. Ohio 1040ez instructions The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Ohio 1040ez instructions Forgone interest. Ohio 1040ez instructions   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Ohio 1040ez instructions Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Ohio 1040ez instructions Internal Revenue Bulletins are available on the IRS web site at www. Ohio 1040ez instructions irs. Ohio 1040ez instructions gov/irb. Ohio 1040ez instructions You can also contact an IRS office to get these rates. Ohio 1040ez instructions Loans subject to the rules. Ohio 1040ez instructions   The rules for below-market loans apply to the following. Ohio 1040ez instructions Gift loans (below-market loans where the forgone interest is in the nature of a gift). Ohio 1040ez instructions Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Ohio 1040ez instructions Corporation-shareholder loans. Ohio 1040ez instructions Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Ohio 1040ez instructions Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Ohio 1040ez instructions   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Ohio 1040ez instructions Treatment of gift and demand loans. Ohio 1040ez instructions   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Ohio 1040ez instructions ) equal to the forgone interest on the loan. Ohio 1040ez instructions You are then treated as transferring this amount back to the lender as interest. Ohio 1040ez instructions These transfers are considered to occur annually, generally on December 31. Ohio 1040ez instructions If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Ohio 1040ez instructions The lender must report it as interest income. Ohio 1040ez instructions Limit on forgone interest for gift loans of $100,000 or less. Ohio 1040ez instructions   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Ohio 1040ez instructions This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Ohio 1040ez instructions If the borrower's net investment income is $1,000 or less, it is treated as zero. Ohio 1040ez instructions This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Ohio 1040ez instructions Treatment of term loans. Ohio 1040ez instructions   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Ohio 1040ez instructions ) on the date the loan is made. Ohio 1040ez instructions This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Ohio 1040ez instructions The same amount is treated as original issue discount on the loan. Ohio 1040ez instructions See Original issue discount (OID) under Interest You Can Deduct, earlier. Ohio 1040ez instructions Exceptions for loans of $10,000 or less. Ohio 1040ez instructions   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Ohio 1040ez instructions This exception applies only to the following. Ohio 1040ez instructions Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Ohio 1040ez instructions Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Ohio 1040ez instructions This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Ohio 1040ez instructions Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Ohio 1040ez instructions Exceptions for loans without significant tax effect. Ohio 1040ez instructions   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Ohio 1040ez instructions Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Ohio 1040ez instructions Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Ohio 1040ez instructions Certain employee-relocation loans. Ohio 1040ez instructions Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Ohio 1040ez instructions S. Ohio 1040ez instructions trade or business and not exempt from U. Ohio 1040ez instructions S. Ohio 1040ez instructions tax under an income tax treaty. Ohio 1040ez instructions Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Ohio 1040ez instructions Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Ohio 1040ez instructions Consider all the following factors. Ohio 1040ez instructions Whether items of income and deduction generated by the loan offset each other. Ohio 1040ez instructions The amount of the items. Ohio 1040ez instructions The cost of complying with the below-market loan provisions if they were to apply. Ohio 1040ez instructions Any reasons, other than taxes, for structuring the transaction as a below-market loan. Ohio 1040ez instructions Exception for loans to qualified continuing care facilities. Ohio 1040ez instructions   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Ohio 1040ez instructions A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Ohio 1040ez instructions Designed to provide services under continuing care contracts (defined below). Ohio 1040ez instructions Includes an independent living unit, and either an assisted living or nursing facility, or both. Ohio 1040ez instructions Substantially all of the independent living unit residents are covered by continuing care contracts. Ohio 1040ez instructions A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Ohio 1040ez instructions The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Ohio 1040ez instructions The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Ohio 1040ez instructions The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Ohio 1040ez instructions For more information, see section 7872(h) of the Internal Revenue Code. Ohio 1040ez instructions Sale or exchange of property. Ohio 1040ez instructions   Different rules generally apply to a loan connected with the sale or exchange of property. Ohio 1040ez instructions If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Ohio 1040ez instructions However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Ohio 1040ez instructions See Unstated Interest and Original Issue Discount (OID) in Publication 537. Ohio 1040ez instructions More information. Ohio 1040ez instructions   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Ohio 1040ez instructions 7872-5 of the regulations. Ohio 1040ez instructions Prev  Up  Next   Home   More Online Publications
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IRS Report on Avoiding Troubled Tax-Advantaged Bonds

The Internal Revenue Service office of Tax Exempt Bonds (TEB) released the report, Avoiding Troubled Tax-Advantaged Bonds. This report produced by the TEB Compliance Practice Research Team seeks to provide aid to issuers of tax-advantaged bonds municipal bonds. It identifies some considerations for issuers of such bonds and is TEB’s initial step toward producing public resource products that assist issuers in avoiding troubled transactions. For more than a decade, TEB observed some of the worst problems in the municipal industry and then witnessed the efforts taken (by leaders in state and local government, the professional communities that support them, and various regulatory bodies) to address them. Many of these complex compliance issues facing issuers of tax-advantaged municipal debt still exist.  

Publishing Avoiding Troubled Tax-Advantaged Bonds is a part of TEB’s continuing effort to provide practical steps and products that may be helpful to issuers of tax-advantaged municipal bonds. As such, we welcome comments and feedback from the tax-advantaged municipal bond community that provide further tools and clarification for issuers. Please submit your comments and feedback to TaxExemptBondQuestions@irs.gov inserting “Avoiding Troubled Tax-Advantaged Bonds Question” on the Subject: line.

The report covers three phases of the life cycle of bonds, each with various considerations, of which an issuer should be aware. These three identified phases are 1) the transaction development phase, 2) the transaction execution phase, and 3) the post-issuance phase. Watch for the TEB presentation of phase one “Transaction Development,” in an upcoming Webinar scheduled for this fall.

TEB hopes that the tax-exempt bond community will use this information to create related products beneficial to their members. These products will provide additional tools that facilitate issuer adoption of practices and procedures that avoid abusive or questionable transactions.

 

 

Page Last Reviewed or Updated: 26-Mar-2014

The Ohio 1040ez Instructions

Ohio 1040ez instructions 3. Ohio 1040ez instructions   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Ohio 1040ez instructions Other income (nonpassive income). Ohio 1040ez instructions Expenses. Ohio 1040ez instructions Additional information. Ohio 1040ez instructions Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Ohio 1040ez instructions Basis. Ohio 1040ez instructions How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Ohio 1040ez instructions Including mutual fund or REMIC expenses in income. Ohio 1040ez instructions Nondeductible ExpensesUsed as collateral. Ohio 1040ez instructions Short-sale expenses. Ohio 1040ez instructions Expenses for both tax-exempt and taxable income. Ohio 1040ez instructions State income taxes. Ohio 1040ez instructions Nondeductible amount. Ohio 1040ez instructions Basis adjustment. Ohio 1040ez instructions How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . Ohio 1040ez instructions Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Ohio 1040ez instructions Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. Ohio 1040ez instructions The at-risk rules and passive activity rules are explained briefly in this section. Ohio 1040ez instructions The limit on investment interest is explained later in this chapter under Interest Expenses . Ohio 1040ez instructions The 2% limit is explained later in this chapter under Expenses of Producing Income . Ohio 1040ez instructions At-risk rules. Ohio 1040ez instructions   Special at-risk rules apply to most income-producing activities. Ohio 1040ez instructions These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Ohio 1040ez instructions Generally, this is the cash and the adjusted basis of property you contribute to the activity. Ohio 1040ez instructions It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. Ohio 1040ez instructions For more information, see Publication 925. Ohio 1040ez instructions Passive activity losses and credits. Ohio 1040ez instructions   The amount of losses and tax credits you can claim from passive activities is limited. Ohio 1040ez instructions Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Ohio 1040ez instructions Also, you can use credits from passive activities only against tax on the income from passive activities. Ohio 1040ez instructions There are exceptions for certain activities, such as rental real estate activities. Ohio 1040ez instructions Passive activity. Ohio 1040ez instructions   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. Ohio 1040ez instructions However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Ohio 1040ez instructions More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. Ohio 1040ez instructions You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Ohio 1040ez instructions  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. Ohio 1040ez instructions However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Ohio 1040ez instructions   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Ohio 1040ez instructions Other income (nonpassive income). Ohio 1040ez instructions    Generally, you can use losses from passive activities only to offset income from passive activities. Ohio 1040ez instructions You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Ohio 1040ez instructions Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Ohio 1040ez instructions It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. Ohio 1040ez instructions This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Ohio 1040ez instructions   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Ohio 1040ez instructions Expenses. Ohio 1040ez instructions   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. Ohio 1040ez instructions However, this interest and other expenses may be subject to other limits. Ohio 1040ez instructions These limits are explained in the rest of this chapter. Ohio 1040ez instructions Additional information. Ohio 1040ez instructions   For more information about determining and reporting income and losses from passive activities, see Publication 925. Ohio 1040ez instructions Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Ohio 1040ez instructions For information on business interest, see chapter 4 of Publication 535. Ohio 1040ez instructions You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. Ohio 1040ez instructions Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Ohio 1040ez instructions You can deduct investment interest subject to the limit discussed later. Ohio 1040ez instructions However, you cannot deduct interest you incurred to produce tax-exempt income. Ohio 1040ez instructions See Tax-exempt income under Nondeductible Expenses, later. Ohio 1040ez instructions You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Ohio 1040ez instructions Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Ohio 1040ez instructions Investment property. Ohio 1040ez instructions   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Ohio 1040ez instructions It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Ohio 1040ez instructions Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Ohio 1040ez instructions Partners, shareholders, and beneficiaries. Ohio 1040ez instructions   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Ohio 1040ez instructions Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Ohio 1040ez instructions Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Ohio 1040ez instructions The allocation is not affected by the use of property that secures the debt. Ohio 1040ez instructions Example 1. Ohio 1040ez instructions You borrow $10,000 and use $8,000 to buy stock. Ohio 1040ez instructions You use the other $2,000 to buy items for your home. Ohio 1040ez instructions Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Ohio 1040ez instructions The other 20% is nondeductible personal interest. Ohio 1040ez instructions Debt proceeds received in cash. Ohio 1040ez instructions   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Ohio 1040ez instructions Debt proceeds deposited in account. Ohio 1040ez instructions   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Ohio 1040ez instructions But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. Ohio 1040ez instructions Example 2. Ohio 1040ez instructions Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Ohio 1040ez instructions You did not buy the household items until June 1. Ohio 1040ez instructions You had deposited the $2,000 in the bank. Ohio 1040ez instructions You had no other transactions on the bank account until June. Ohio 1040ez instructions You did not sell the stock, and you made no principal payments on the debt. Ohio 1040ez instructions You paid interest from another account. Ohio 1040ez instructions The $8,000 is treated as being used for an investment purpose. Ohio 1040ez instructions The $2,000 is treated as being used for an investment purpose for the 3-month period. Ohio 1040ez instructions Your total interest expense for 3 months on this debt is investment interest. Ohio 1040ez instructions In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. Ohio 1040ez instructions Amounts paid within 30 days. Ohio 1040ez instructions   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Ohio 1040ez instructions This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Ohio 1040ez instructions   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Ohio 1040ez instructions Payments on debt may require new allocation. Ohio 1040ez instructions   As you repay a debt used for more than one purpose, you must reallocate the balance. Ohio 1040ez instructions You must first reduce the amount allocated to personal purposes by the repayment. Ohio 1040ez instructions You then reallocate the rest of the debt to find what part is for investment purposes. Ohio 1040ez instructions Example 3. Ohio 1040ez instructions If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Ohio 1040ez instructions The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Ohio 1040ez instructions Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Ohio 1040ez instructions Pass-through entities. Ohio 1040ez instructions   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. Ohio 1040ez instructions If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Ohio 1040ez instructions Additional allocation rules. Ohio 1040ez instructions   For more information about allocating interest expense, see chapter 4 of Publication 535. Ohio 1040ez instructions When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Ohio 1040ez instructions If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Ohio 1040ez instructions For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Ohio 1040ez instructions Example. Ohio 1040ez instructions You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Ohio 1040ez instructions On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Ohio 1040ez instructions If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. Ohio 1040ez instructions If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. Ohio 1040ez instructions Interest paid in advance. Ohio 1040ez instructions   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. Ohio 1040ez instructions You can deduct in each year only the interest for that year. Ohio 1040ez instructions Interest on margin accounts. Ohio 1040ez instructions   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. Ohio 1040ez instructions You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Ohio 1040ez instructions Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. Ohio 1040ez instructions   You cannot deduct any interest on money borrowed for personal reasons. Ohio 1040ez instructions Limit on interest deduction for market discount bonds. Ohio 1040ez instructions   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. Ohio 1040ez instructions This limit does not apply if you accrue the market discount and include it in your income currently. Ohio 1040ez instructions   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. Ohio 1040ez instructions Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Ohio 1040ez instructions Interest not deducted due to limit. Ohio 1040ez instructions   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. Ohio 1040ez instructions Choosing to deduct disallowed interest expense before the year of disposition. Ohio 1040ez instructions   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. Ohio 1040ez instructions The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Ohio 1040ez instructions Net interest income. Ohio 1040ez instructions   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. Ohio 1040ez instructions Limit on interest deduction for short-term obligations. Ohio 1040ez instructions   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. Ohio 1040ez instructions   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). Ohio 1040ez instructions The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Ohio 1040ez instructions Interest not deducted due to limit. Ohio 1040ez instructions   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. Ohio 1040ez instructions Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Ohio 1040ez instructions Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Ohio 1040ez instructions You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Ohio 1040ez instructions The interest carried over is treated as investment interest paid or accrued in that next year. Ohio 1040ez instructions You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Ohio 1040ez instructions Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Ohio 1040ez instructions Investment income. Ohio 1040ez instructions   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Ohio 1040ez instructions Investment income does not include Alaska Permanent Fund dividends. Ohio 1040ez instructions It also does not include qualified dividends or net capital gain unless you choose to include them. Ohio 1040ez instructions Choosing to include qualified dividends. Ohio 1040ez instructions   Investment income generally does not include qualified dividends, discussed in chapter 1. Ohio 1040ez instructions However, you can choose to include all or part of your qualified dividends in investment income. Ohio 1040ez instructions   You make this choice by completing Form 4952, line 4g, according to its instructions. Ohio 1040ez instructions   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Ohio 1040ez instructions Choosing to include net capital gain. Ohio 1040ez instructions    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Ohio 1040ez instructions However, you can choose to include all or part of your net capital gain in investment income. Ohio 1040ez instructions   You make this choice by completing Form 4952, line 4g, according to its instructions. Ohio 1040ez instructions   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Ohio 1040ez instructions   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Ohio 1040ez instructions    Before making either choice, consider the overall effect on your tax liability. Ohio 1040ez instructions Compare your tax if you make one or both of these choices with your tax if you do not. Ohio 1040ez instructions Investment income of child reported on parent's return. Ohio 1040ez instructions   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Ohio 1040ez instructions If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. Ohio 1040ez instructions Include it on line 4a of Form 4952. Ohio 1040ez instructions Example. Ohio 1040ez instructions Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Ohio 1040ez instructions You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Ohio 1040ez instructions Also enter $200 on Form 1040, line 21. Ohio 1040ez instructions Your investment income includes this $200. Ohio 1040ez instructions Child's qualified dividends. Ohio 1040ez instructions   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Ohio 1040ez instructions However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Ohio 1040ez instructions   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Ohio 1040ez instructions Child's Alaska Permanent Fund dividends. Ohio 1040ez instructions   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Ohio 1040ez instructions To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Ohio 1040ez instructions Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Ohio 1040ez instructions Subtract the result from the amount on Form 8814, line 12. Ohio 1040ez instructions Example. Ohio 1040ez instructions Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Ohio 1040ez instructions You choose to report this on your return. Ohio 1040ez instructions You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Ohio 1040ez instructions You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Ohio 1040ez instructions You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. Ohio 1040ez instructions Child's capital gain distributions. Ohio 1040ez instructions   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. Ohio 1040ez instructions However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Ohio 1040ez instructions   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Ohio 1040ez instructions Investment expenses. Ohio 1040ez instructions   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Ohio 1040ez instructions Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Ohio 1040ez instructions Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. Ohio 1040ez instructions See Expenses of Producing Income , later, for a discussion of the 2% limit. Ohio 1040ez instructions Losses from passive activities. Ohio 1040ez instructions   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Ohio 1040ez instructions See Publication 925 for information about passive activities. Ohio 1040ez instructions Example. Ohio 1040ez instructions Ted is a partner in a partnership that operates a business. Ohio 1040ez instructions However, he does not materially participate in the partnership's business. Ohio 1040ez instructions Ted's interest in the partnership is considered a passive activity. Ohio 1040ez instructions Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Ohio 1040ez instructions His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Ohio 1040ez instructions His investment interest expense is $8,000. Ohio 1040ez instructions Ted also has income from the partnership of $2,000. Ohio 1040ez instructions Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. Ohio 1040ez instructions His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Ohio 1040ez instructions Form 4952 Use Form 4952 to figure your deduction for investment interest. Ohio 1040ez instructions See Form 4952 for more information. Ohio 1040ez instructions Exception to use of Form 4952. Ohio 1040ez instructions   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Ohio 1040ez instructions Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Ohio 1040ez instructions You do not have any other deductible investment expenses. Ohio 1040ez instructions You have no carryover of investment interest expense from 2012. Ohio 1040ez instructions   If you meet all of these tests, you can deduct all of your investment interest. Ohio 1040ez instructions    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Ohio 1040ez instructions If the bond yields taxable interest, you can choose to amortize the premium. Ohio 1040ez instructions This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. Ohio 1040ez instructions If you make this choice, you must reduce your basis in the bond by the amortization for the year. Ohio 1040ez instructions If the bond yields tax-exempt interest, you must amortize the premium. Ohio 1040ez instructions This amortized amount is not deductible in determining taxable income. Ohio 1040ez instructions However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. Ohio 1040ez instructions Bond premium. Ohio 1040ez instructions   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). Ohio 1040ez instructions For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Ohio 1040ez instructions Special rules to determine amounts payable on a bond. Ohio 1040ez instructions   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Ohio 1040ez instructions 171-3. Ohio 1040ez instructions Basis. Ohio 1040ez instructions   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. Ohio 1040ez instructions However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. Ohio 1040ez instructions See Regulations section 1. Ohio 1040ez instructions 171-1(e). Ohio 1040ez instructions Dealers. Ohio 1040ez instructions   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. Ohio 1040ez instructions   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Ohio 1040ez instructions How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. Ohio 1040ez instructions Constant yield method. Ohio 1040ez instructions   Figure the bond premium amortization for each accrual period as follows. Ohio 1040ez instructions Step 1: Determine your yield. Ohio 1040ez instructions   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. Ohio 1040ez instructions Figure the yield as of the date you got the bond. Ohio 1040ez instructions It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. Ohio 1040ez instructions   If you do not know the yield, consult your broker or tax advisor. Ohio 1040ez instructions Databases available to them are likely to show the yield at the date of purchase. Ohio 1040ez instructions Step 2: Determine the accrual periods. Ohio 1040ez instructions   You can choose the accrual periods to use. Ohio 1040ez instructions They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. Ohio 1040ez instructions The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Ohio 1040ez instructions Step 3: Determine the bond premium for the accrual period. Ohio 1040ez instructions   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Ohio 1040ez instructions Then subtract the result from the qualified stated interest for the period. Ohio 1040ez instructions   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Ohio 1040ez instructions After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. Ohio 1040ez instructions Example. Ohio 1040ez instructions On February 1, 2012, you bought a taxable bond for $110,000. Ohio 1040ez instructions The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). Ohio 1040ez instructions The bond pays qualified stated interest of $10,000 on February 1 of each year. Ohio 1040ez instructions Your yield is 8. Ohio 1040ez instructions 07439% compounded annually. Ohio 1040ez instructions You choose to use annual accrual periods ending on February 1 of each year. Ohio 1040ez instructions To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. Ohio 1040ez instructions When you subtract the result ($8,881. Ohio 1040ez instructions 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Ohio 1040ez instructions 17. Ohio 1040ez instructions Special rules to figure amortization. Ohio 1040ez instructions   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Ohio 1040ez instructions 171-3. Ohio 1040ez instructions Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Ohio 1040ez instructions Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Ohio 1040ez instructions Straight-line method. Ohio 1040ez instructions   Under this method, the amount of your bond premium amortization is the same each month. Ohio 1040ez instructions Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. Ohio 1040ez instructions Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Ohio 1040ez instructions This gives you your bond premium amortization for the year. Ohio 1040ez instructions Revenue Ruling 82-10 method. Ohio 1040ez instructions   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Ohio 1040ez instructions This method is explained in Revenue Ruling 82-10, 1982-1 C. Ohio 1040ez instructions B. Ohio 1040ez instructions 46. Ohio 1040ez instructions Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. Ohio 1040ez instructions You should attach a statement to your return that you are making this choice under section 171. Ohio 1040ez instructions See How To Report Amortization, next. Ohio 1040ez instructions This choice is binding for the year you make it and for later tax years. Ohio 1040ez instructions It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Ohio 1040ez instructions You can change your decision to amortize bond premium only with the written approval of the IRS. Ohio 1040ez instructions To request approval, use Form 3115. Ohio 1040ez instructions For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Ohio 1040ez instructions You can find Revenue Procedure 2011-14 at www. Ohio 1040ez instructions irs. Ohio 1040ez instructions gov/irb/2011-04_IRB/ar08. Ohio 1040ez instructions html. Ohio 1040ez instructions How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Ohio 1040ez instructions Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Ohio 1040ez instructions Under your last entry on line 1, put a subtotal of all interest listed on line 1. Ohio 1040ez instructions Below this subtotal, print “ABP Adjustment,” and the total interest you received. Ohio 1040ez instructions Subtract this amount from the subtotal, and enter the result on line 2. Ohio 1040ez instructions Bond premium amortization more than interest. Ohio 1040ez instructions   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. Ohio 1040ez instructions    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Ohio 1040ez instructions Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Ohio 1040ez instructions Pre-1998 election to amortize bond premium. Ohio 1040ez instructions   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Ohio 1040ez instructions Bonds acquired before October 23, 1986. Ohio 1040ez instructions   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Ohio 1040ez instructions Bonds acquired after October 22, 1986, but before 1988. Ohio 1040ez instructions    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. Ohio 1040ez instructions Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Ohio 1040ez instructions To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. Ohio 1040ez instructions The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Ohio 1040ez instructions The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Ohio 1040ez instructions The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Ohio 1040ez instructions For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Ohio 1040ez instructions Attorney or accounting fees. Ohio 1040ez instructions   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Ohio 1040ez instructions However, in some cases, attorney or accounting fees are part of the basis of property. Ohio 1040ez instructions See Basis of Investment Property in chapter 4. Ohio 1040ez instructions Automatic investment service and dividend reinvestment plans. Ohio 1040ez instructions   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Ohio 1040ez instructions Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Ohio 1040ez instructions Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Ohio 1040ez instructions   A corporation in which you own stock also may have a dividend reinvestment plan. Ohio 1040ez instructions This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. Ohio 1040ez instructions   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Ohio 1040ez instructions If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Ohio 1040ez instructions Deduct the charges in the year you pay them. Ohio 1040ez instructions Clerical help and office rent. Ohio 1040ez instructions   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. Ohio 1040ez instructions Cost of replacing missing securities. Ohio 1040ez instructions   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Ohio 1040ez instructions You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Ohio 1040ez instructions   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Ohio 1040ez instructions Under certain types of insurance policies, you can recover some of the expenses. Ohio 1040ez instructions   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. Ohio 1040ez instructions If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. Ohio 1040ez instructions Fees to collect income. Ohio 1040ez instructions   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. Ohio 1040ez instructions Fees to buy or sell. Ohio 1040ez instructions   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Ohio 1040ez instructions You must add the fee to the cost of the property. Ohio 1040ez instructions See Basis of Investment Property in chapter 4. Ohio 1040ez instructions    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. Ohio 1040ez instructions They can be used only to figure gain or loss from the sale. Ohio 1040ez instructions See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Ohio 1040ez instructions Investment counsel and advice. Ohio 1040ez instructions   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Ohio 1040ez instructions This includes amounts you pay for investment advisory services. Ohio 1040ez instructions Safe deposit box rent. Ohio 1040ez instructions   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. Ohio 1040ez instructions If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Ohio 1040ez instructions See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Ohio 1040ez instructions State and local transfer taxes. Ohio 1040ez instructions   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Ohio 1040ez instructions If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Ohio 1040ez instructions If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Ohio 1040ez instructions Trustee's commissions for revocable trust. Ohio 1040ez instructions   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. Ohio 1040ez instructions However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. Ohio 1040ez instructions   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. Ohio 1040ez instructions You cannot deduct the entire amount in the year you pay it. Ohio 1040ez instructions Investment expenses from pass-through entities. Ohio 1040ez instructions   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. Ohio 1040ez instructions A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). Ohio 1040ez instructions A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Ohio 1040ez instructions Publicly-offered mutual funds are discussed later. Ohio 1040ez instructions   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. Ohio 1040ez instructions Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). Ohio 1040ez instructions   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. Ohio 1040ez instructions Including mutual fund or REMIC expenses in income. Ohio 1040ez instructions   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. Ohio 1040ez instructions You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. Ohio 1040ez instructions If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). Ohio 1040ez instructions If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. Ohio 1040ez instructions If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Ohio 1040ez instructions Publicly-offered mutual funds. Ohio 1040ez instructions   Most mutual funds are publicly offered. Ohio 1040ez instructions These mutual funds, generally, are traded on an established securities exchange. Ohio 1040ez instructions These funds do not pass investment expenses through to you. Ohio 1040ez instructions Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. Ohio 1040ez instructions As a result, you cannot deduct the expenses on your return. Ohio 1040ez instructions   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Ohio 1040ez instructions    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. Ohio 1040ez instructions Contact your mutual fund if you are not sure whether it is publicly offered. Ohio 1040ez instructions Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Ohio 1040ez instructions Stockholders' meetings. Ohio 1040ez instructions   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. Ohio 1040ez instructions This is true even if your purpose in attending is to get information that would be useful in making further investments. Ohio 1040ez instructions Investment-related seminar. Ohio 1040ez instructions   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Ohio 1040ez instructions Single-premium life insurance, endowment, and annuity contracts. Ohio 1040ez instructions   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Ohio 1040ez instructions Used as collateral. Ohio 1040ez instructions   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. Ohio 1040ez instructions Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. Ohio 1040ez instructions Borrowing on insurance. Ohio 1040ez instructions   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. Ohio 1040ez instructions This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. Ohio 1040ez instructions Tax-exempt income. Ohio 1040ez instructions   You cannot deduct expenses you incur to produce tax-exempt income. Ohio 1040ez instructions Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. Ohio 1040ez instructions Short-sale expenses. Ohio 1040ez instructions   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. Ohio 1040ez instructions However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. Ohio 1040ez instructions Short sales are discussed in Short Sales in chapter 4. Ohio 1040ez instructions Expenses for both tax-exempt and taxable income. Ohio 1040ez instructions   You may have expenses that are for both tax-exempt and taxable income. Ohio 1040ez instructions If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. Ohio 1040ez instructions You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. Ohio 1040ez instructions   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Ohio 1040ez instructions If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Ohio 1040ez instructions To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. Ohio 1040ez instructions Example. Ohio 1040ez instructions You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Ohio 1040ez instructions In earning this income, you had $500 of expenses. Ohio 1040ez instructions You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Ohio 1040ez instructions 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Ohio 1040ez instructions You cannot deduct $400 (80% of $500) of the expenses. Ohio 1040ez instructions You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Ohio 1040ez instructions State income taxes. Ohio 1040ez instructions   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Ohio 1040ez instructions But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Ohio 1040ez instructions Interest expense and carrying charges on straddles. Ohio 1040ez instructions   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Ohio 1040ez instructions The nondeductible interest and carrying charges are added to the basis of the straddle property. Ohio 1040ez instructions However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. Ohio 1040ez instructions  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Ohio 1040ez instructions   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Ohio 1040ez instructions However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Ohio 1040ez instructions   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). Ohio 1040ez instructions Nondeductible amount. Ohio 1040ez instructions   Figure the nondeductible interest and carrying charges on straddle property as follows. Ohio 1040ez instructions Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. Ohio 1040ez instructions Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. Ohio 1040ez instructions Basis adjustment. Ohio 1040ez instructions   Add the nondeductible amount to the basis of your straddle property. Ohio 1040ez instructions How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Ohio 1040ez instructions Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Ohio 1040ez instructions Include any deductible short sale expenses. Ohio 1040ez instructions (See Short Sales in chapter 4 for information on these expenses. Ohio 1040ez instructions ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Ohio 1040ez instructions Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Ohio 1040ez instructions List the type and amount of each expense on the dotted lines next to line 23. Ohio 1040ez instructions (If necessary, you can show the required information on an attached statement. Ohio 1040ez instructions ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Ohio 1040ez instructions When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. Ohio 1040ez instructions If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Ohio 1040ez instructions Also see When To Deduct Investment Interest , earlier in this chapter. Ohio 1040ez instructions Unpaid expenses owed to related party. Ohio 1040ez instructions   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. Ohio 1040ez instructions The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. Ohio 1040ez instructions If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. Ohio 1040ez instructions   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Ohio 1040ez instructions It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Ohio 1040ez instructions   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. Ohio 1040ez instructions This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. Ohio 1040ez instructions Prev  Up  Next   Home   More Online Publications