Day _11 ACIS3314 Spring 2011 OID

Day _11 ACIS3314 Spring 2011 OID - ACIS 3314 Tax Impact on...

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ACIS 3314, Cloyd, Day 11 1 1 Gross Income 3: Imputed Income ACIS 3314 Tax Impact on Decisions 2 Tasks for Today: Imputed Income Cash vs. Accrual Method of Accounting Three examples of imputed income: 1. Original Issue Discount – §§1271-1275 2. Imputed Interest on Below-Market Loans – §7872 3. Interest on Certain Deferred Payments – §483 3 When is Income Subject to Taxation? Accounting Methods Cash receipts method —Income is recognized in the year it is actually or constructively received in cash or cash equivalent. Accrual method —Income is recognized in the year that it is earned regardless of when it is collected. All Events Test : 1. All events have occurred to fix the taxpayer’s right to receive the income and 2. Amount can be determined with reasonable accuracy.
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ACIS 3314, Cloyd, Day 11 2 4 Exception for Cash-Basis Taxpayers: OID • Suppose a bank advertised ―investment certificates‖ that paid NO interest, yet were redeemable after a period of time for more than the original amount invested. When should the “discount” be taken into income? Original Issue Discount – Interest income attributable to OID is amortized into income as earned (using the effective interest rate method) rather than when the interest is actually received. OID = Excess (if any) of the stated redemption price at maturity over the issue price [§1273(a)]. 5 Debtor Corporation makes a public offering of its bonds. The bonds have an issue price of $7,903 , but are redeemable in 3 years for $10,000 . Although the bonds do not pay interest per se , the bonds have an effective interest rate of 8% (if interest is compounded every 6 months). If a cash- basis taxpayer purchased one of these bonds on January 1, her taxable income would be reported as follows: Original Issue Discount: Example
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Day _11 ACIS3314 Spring 2011 OID - ACIS 3314 Tax Impact on...

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