The election to amortize under IRC section 171(a)(1) is done under a constant yield method
, based upon the bond's yield to maturity.
1.1273-1(d)(2) ($125,000 = $10 million X 0.0025 X 5 years), X must allocate the OID to each year based on the constant yield method described in Regs.
1.1272-1(b) constant yield method to allocate the debt issuance costs to each year.
If X chooses to use the constant yield method, the yield would be 5.279%, compounded annually.
If the amount of OID is not de minimis, the points must be amortized using the constant yield method
Taxpayers currently accounting for stated interest on short-term consumer loans under the Rule of 78s method may automatically change to the constant yield method under the general automatic method change procedures of Rev.
The constant yield method allocates interest and original issue discount over a loan term based on a constant yield.
The ownership interest holder must compute the income from the qualified debt assets under a constant yield method
, including the rules of Sec.
For example, if a series of futures contracts or options is used to hedge an interest-rate risk from a taxpayer's issuance of fixed interest-rate debt, any gain or loss on the hedging transactions should be accounted for using a constant yield method
over the instrument's life.
(Additional guidance for Form 1099-OID reporting will be issued later by the IRS.) Generally, the issue may deduct OID under its overall accounting method (cash or accrual basis) using the constant yield method described in Regs.
This method would also approximate the constant yield method for standard fixed-rate mortgages
27, 1985 must generally use the constant yield method