Frequently Asked Questions
Who is eligible for the Amortizable Bond Premium Deduction?
Applies to taxable bonds where the purchase price was higher than the face value; requires an election that then applies to all similar bonds held by the taxpayer.
How does the Amortizable Bond Premium Deduction work?
Taxpayers can elect to amortize the premium paid for a taxable bond, using the amount to offset and reduce the interest income reported from the bond.
What law authorizes the Amortizable Bond Premium Deduction?
The Amortizable Bond Premium Deduction is authorized under IRC §171 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §171
Source: Internal Revenue Code, Title 26, United States Code
§ 171. Amortizable bond premium(a) General ruleIn the case of any bond, as defined in subsection (d), the following rules shall apply to the amortizable bond premium (determined under subsection (b)) on the bond:(1) Taxable bondsIn the case of a bond (other than a bond the interest on which is excludable from gross income), the amount of the amortizable bond premium for the taxable year shall be allowed as a deduction.
(2) Tax-exempt bondsIn the case of any bond the interest on which is excludable from gross income, no deduction shall be allowed for the amortizable bond premium for the taxable year.
(3) Cross referenceFor adjustment to basis on account of amortizable bond premium, see section 1016(a)(5).
(b) Amortizable bond premium(1) Amount of bond premiumFor purposes of paragraph (2), the amount of bond premium, in the case of the holder of any bond, shall be determined—(A) with reference to the amount of the basis (for determining loss on sale or exchange) of such bond,
(B)(i) with reference to the amount payable on maturity (or if it results in a smaller amortizable bond premium attributable to the period before the call date, with reference to the amount payable on the earlier call date), in the case of a bond described in subsection (a)(1), and
(ii) with reference to the amount payable on maturity or on an earlier call date, in the case of a bond described in subsection (a)(2).
(C) with adjustments proper to reflect unamortized bond premium, with respect to the bond, for the period before the date as of which subsection (a) becomes applicable with respect to the taxpayer with respect to such bond.
In no case shall the amount of bond premium on a convertible bond include any amount attributable to the conversion features of the bond.
(2) Amount amortizableThe amortizable bond premium of the taxable year shall be the amount of the bond premium attributable to such year. In the case of a bond to which paragraph (1)(B)(i) applies and which has a call date, the amount of bond premium attributable to the taxable year in which the bond is called shall include an amount equal to the excess of the amount of the adjusted basis (for determining loss on sale or exchange) of such bond as of the beginning of the taxable year over the amount received on redemption of the bond or (if greater) the amount payable on maturity.
(3) Method of determination(A) In generalExcept as provided in regulations prescribed by the Secretary, the determinations required under paragraphs (1) and (2) shall be made on the basis of the taxpayer’s yield to maturity determined by—(i) using the taxpayer’s basis (for purposes of determining loss on sale or exchange) of the obligation, and
(ii) compounding at the close of each accrual period (as defined in section 1272(a)(5)).
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