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Instructions and Help about Form 8815 turbotax
Hello the session in which we would look at the topic of the original issue discount bond but before we talked about this we need to kind of go back and review what we learned in a prior session and in the prior session we looked at something called constructive receipts and what is constructive receipts this is a review it's the doctrine that states that if the income is available the taxpayer should not be allowed to postpone the income recognition so we looked at this principle or this this concept in a private session and basically state if the income is available to you then you cannot postpone the income recognition so if it's available you should include it in your in your and your taxes and we looked at a few examples so one thing we're gonna look at today is something called original issue discount so let's talk about original issue discount because this is one of the topics that we need to kind of get kind of an exception to the rule and what is a discount a bond or a loan issued at a discount you go to the bank and you learn about this in financial accounting you want to borrow let's assume $100,000 that's the amount you want to borrow the bank would say something to the effect that I'm gonna give you today let's just say $80,000 today and you will pay me pay me back $100,000 that's assumed in three years so what does this picture looks like so basically today I'm gonna give you 80,000 today and in three years you're gonna give me back 100,000 what is implied in this deal is this there's an interest component of $20,000 but you don't have to pay me any interest until three years from now so let's look at it from a journal entry perspective from a journal entry perspective you're gonna debit cash eighty thousand you're gonna credit notes payable 100 thousand and if you remember you are going to credit I'm sorry you're going to debit discount of twenty thousand so this is an example of the we called original issue discount know what's gonna happen in three years your payback you are responsible for paying back one hundred thousand which is part of it this is the interest but the question is this for tax purposes when do you record the interest do you record the interest when you pay it and here three four do you record the interest as it accrues over a period of three years and we're going to look at this actually you are going to report the interest as it accrues okay so lenders frequently that's take a look at this lenders frequently make loans that require payment at maturity more than the original loan and now eighty thousand versus one hundred thousand the difference between the amount due at maturity is actually interest referred to as the original issue.