Understanding De Minimis Amount [Internal Revenue]: A Comprehensive Guide
Definition & meaning
The term De Minimis Amount refers to a small amount of original issue discount or premium on a financial obligation that is considered negligible for tax purposes. Specifically, it is defined as:
For original issue discount: An amount that does not exceed two percent of the stated redemption price at maturity, plus any original issue premium that is solely due to reasonable underwriters' compensation.
For market discount: An amount that does not exceed two percent of the stated redemption price at maturity.
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The De Minimis Amount is primarily used in tax law, particularly regarding the treatment of original issue discounts and market discounts on bonds and other financial instruments. This term is relevant for taxpayers who need to determine whether a discount or premium is significant enough to affect their tax obligations. Users can manage related forms and procedures through platforms like US Legal Forms, which offer templates for tax-related documents.
Key Legal Elements
Real-World Examples
Here are a couple of examples of abatement:
Example 1: A bond has a stated redemption price of $1,000. The De Minimis Amount would be $20 (2% of $1,000). If the original issue discount is $15, it falls under the De Minimis Amount and is not subject to tax.
Example 2: A bond with a market discount of $25, with the same stated redemption price, also qualifies as a De Minimis Amount since it does not exceed $20 (hypothetical example).
Relevant Laws & Statutes
The De Minimis Amount is defined under 26 CFR 1.148-1(b), which outlines the tax implications of original issue discounts and market discounts.
Comparison with Related Terms
Term
Definition
Key Difference
Original Issue Discount
A discount on a bond issued below its face value.
De Minimis Amount refers specifically to small discounts that are not taxable.
Market Discount
The difference between a bond's purchase price and its face value when bought in the secondary market.
De Minimis Amount applies to small market discounts that do not trigger tax liabilities.
Common Misunderstandings
What to Do If This Term Applies to You
If you believe the De Minimis Amount applies to your financial situation, consider the following steps:
Review your financial documents to identify any original issue discounts or market discounts.
Calculate whether your discounts fall under the De Minimis Amount threshold.
Use US Legal Forms to find templates for tax-related documents that can help you report these amounts accurately.
If you are unsure, consult a tax professional for personalized advice.
Quick Facts
Attribute
Details
Threshold for De Minimis Amount
Two percent of the stated redemption price at maturity
Applicable Discounts
Original issue discount and market discount
Tax Implication
Amounts under the De Minimis threshold are not taxable
Key Takeaways
FAQs
The De Minimis Amount refers to small discounts on bonds that are not taxable, specifically defined as two percent of the stated redemption price at maturity.
To calculate it, multiply the stated redemption price at maturity by two percent.
It specifically applies to original issue discounts and market discounts on bonds.
If your discount exceeds this threshold, you may need to report it as taxable income. Consulting a tax professional is advisable.
Yes, US Legal Forms provides templates that can help you manage tax-related documents effectively.
