The IRS and Treasury Department have published final and temporary regulations that simplify accounting and provide favorable tax treatment to holders of certain debt instruments purchased at a premium. Institutions will need to adjust their systems and processes to incorporate the new guidance. What you need to do: http://gt-us.co/1nYDp2u
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The IRS and Treasury Department have published final and temporary regulations that simplify accounting and provide favorable tax treatment to holders of certain debt instruments purchased at a premium. Institutions will need to adjust their systems and processes to incorporate the new guidance. New guidance addresses bond premiums for TIPS and other debt instruments Background Market conditions in recent years have made bonds purchased at a premium more common. Bond holders have had two concerns about accounting for these instruments: 1. That the simplified accrual method (or, coupon bond method) was not permissible for Treasury inflation-protected securities (TIPS); 2. That any loss for the bond premium carryforward — the bond premium that accrued but was not deductible by the holder — existing at the time of sale, retirement or other disposition of a taxable debt instrument would be treated as a capital loss. Guidance for bond premiums 1. Required use of simplified accrual method In December 2011, the IRS issued temporary regulations that require the use of the simplified accrual method for TIPS with more than de minimis premium. The final regulations adopt these rules without substantive change. The rules include an example that demonstrates the coupon bond method and the bond premium accrual method for TIPS with a negative yield. Taxpayers may not apply the more complex discount bond method to these instruments. The final regulations were effective Jan. 4, 2013, and apply to TIPS issued after April 7, 2011.
Transcript
The IRS and Treasury Department have published final and temporary regulations that simplify accounting and provide favorable tax treatment to holders of certain debt instruments purchased at a premium. Institutions will need to adjust their systems and processes to incorporate the new guidance.
New guidance addresses bond premiums for TIPS and other debt instruments
BackgroundMarket conditions in recent years have made bonds purchased at a premium more common. Bond holders have had two concerns about accounting for these instruments:
1. That the simplified accrual method (or, coupon bond method) was not permissible for Treasury inflation-protected securities (TIPS);
2. That any loss for the bond premium carryforward — the bond premium that accrued but was not deductible by the holder — existing at the time of sale, retirement or other disposition of a taxable debt instrument would be treated as a capital loss.
Guidance for bond premiums1. Required use of simplified accrual method
In December 2011, the IRS issued temporary regulations that require the use of the simplified accrual method for TIPS with more than de minimis premium. The final regulations adopt these rules without substantive change. The rules include an example that demonstrates the coupon bond method and the bond premium accrual method for TIPS with a negative yield. Taxpayers may not apply the more complex discount bond method to these instruments. The final regulations were effective Jan. 4, 2013, and apply to TIPS issued after April 7, 2011.
New guidance addresses bond premiums for TIPS and other debt instruments
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What you need to doInstitutions have two choices in how they will produce the calculations the new guidance requires:
1. Apply these new calculations directly to theirpractical business solutions, working withan outside adviser to make certain they areperformed correctly.
2. Work with a knowledgeable third party toprogram these methods into your systems,ensuring that:
– Input data is accurate, complete, authorizedand correct
– Data is processed as intended in an acceptable time period
– Data stored is accurate and complete
– Outputs are accurate and complete
– A record is maintained to track the process of data from input to storage and to the eventual output
– The resulting calculations adhere to the final regulations
ContactsJim MarksDirectorFinancial ServicesTaxT 617.973.4730 E [email protected]
John M. Stomper PartnerAudit ServicesT 312.602.8080E [email protected]
2. Ordinary loss at end of final accrual periodThe new guidance provides temporary regulationson the tax treatment of a taxable debt instrument(including TIPS or other Treasuries) with abond premium carryforward in the holder’sfinal accrual period. Specifically, if a taxpayerhas elected to amortize the bond premium, theregulations provide an ordinary loss (i.e., a bondpremium deduction) at the end of the holder’sfinal accrual period equal to the amount of thebond premium carryforward. This bond premiumdeduction also reduces the holder’s basis in thebond. These adjustments are taken at the time ofsale, retirement or disposition. The temporaryregulations are effective for a debt instrumentacquired on or after Jan. 4, 2013, but a taxpayermay rely on these rules for a debt instrumentacquired before that date.
