Cost Basis Reporting Takeaway – Disallowed Carryover: Tracking and Reporting

With 2015 now underway, cost basis reporting is top-of-mind for brokers and investors as they comply with the complex mandates, and look to maintain operational efficiency. Bob Linville, Director of Product Management, Scivantage, helps to clarify the meaning of disallowed carryover offset in his most recent video – Reporting and Tracking Disallowed Carryover Offset – as part of his Cost Basis Reporting video series.

Linville points out that when an investor pays a premium on a debt instrument, the IRS allows the amortization of a portion of that premium during each payment period for the duration of the instrument’s lifespan. This amortization can then be offset against the instrument’s taxable interest earnings.

“If you are earning $100 in interest, and you’ve paid a premium, and you calculate that there’s $20 worth that’s been amortized, you can offset that so you’re only taxed on $80,” explains Linville. However, the challenge occurs in circumstances when the amortization is greater than the interest earned, resulting in a negative yield situation. Negative yields can also occur when the investor elects not to amortize the premium over a certain period of time.

“In both of these circumstances when there’s an amortized premium not offset by income, that premium amount is carried over,” Linville adds. The investor can use that amount as a deduction or capital loss later on, but for the lifespan of that debt, that amount has to be carried over. This amount is referred to as disallowed carryover interest, which can also be explained as an amortized premium that has not been applied to reduce the cost basis.

It’s important for brokers and investors to understand how to approach reporting and tracking of these carryovers, as it will help to ensure accuracy and efficiency throughout the process.

Catch up on our Cost Basis Reporting Takeaway series for the latest news and information on cost basis reporting compliance.


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