Publication 550 |
2000 Tax Year |
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.
If you use an accrual method, you generally deduct your expenses
when you incur a liability for them, rather than when you pay them.
Also see When To Deduct Investment Interest, earlier in
this chapter. Unpaid expenses owed to related party.
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. 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. 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.
This rule generally applies to those relationships listed in
chapter 4
under Related Party Transactions. It also applies
to accruals by partnerships to partners, partners to partnerships,
shareholders to S corporations, and S corporations to shareholders.
The postponement of deductions for unpaid expenses and interest
under the related party rule does not apply to original issue discount
(OID), regardless of when payment is made. 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 though a payment has
not been made.
Illustrated Form 4952
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