Debt Instrument Election and Accrual Method Update Instructions
Debt Instrument Election and Accrual Method
Debt Instrument Election and Accrual Method Update Instructions
Taxpayer rules surrounding elections are complex. Pershing strongly encourages clients to consult with their tax advisor before choosing to apply
an alternative to the default.
Election 1 – Bond Premium Amortization
(Internal Revenue Code [IRC] section 171)
In
the Instrument
past, PershingElection
had assumed
the client
made this election and
Debt
and Accrual
Method
Election 3 – Include Market Discount as Income
(IRC section 1278[b])
The client has a choice of paying the accrued income annually or at
amortized
the surrounding
bond premium
by adjusting
costPershing
basis downward
the final
disposal
of the with
bond.their
In the
Pershing
cost
Taxpayer rules
elections
are complex.
strongly encourages
clients
to consult
tax past,
advisor
before adjusted
choosingthe
to apply
towards
the
par
value
of
the
bond.
However,
Pershing
did
not
adjust
the
of
the
bond
upwards
towards
par,
assuming
the
accrued
income
was
an alternative to the default.
interest payment for this amortization. Under the new rules, Pershing
being paid annually. Beginning with new purchases in 2014, Pershing
will supply the IRS with the amount of amortized bond premium on
is no longer permitted to assume this election has been made and will
Election 1 –after
Bond
Premium
Amortization
Election
Include
Discount
as Income
purchases
January
1, 2014
unless the client elects not to amortize
no
longer3 –
adjust
the Market
cost basis
on discounted
bonds covered under
the
bond premium.
this
(Internal
Revenue Code [IRC] section 171)
(IRCelection.
section 1278[b])
In the past,
assumed
the client
made this
and IfThe
client
has aischoice
paying
thewill
accrued
annually
at
Default
rule:Pershing
The IRShad
requires
Pershing
to assume
thatelection
you HAVE
this
election
made,ofcost
basis
show income
as adjusted
andorthe
amortized
the bond
by adjusting
basis on
downward
the finalincome
disposalwill
of be
thereported
bond. Intothe
Pershing
adjusted
made
this election
andpremium
will amortize
the bond cost
premiums
taxable accrued
thepast,
IRS on
an annual
basis.the cost
towards
the par value of the bond. However, Pershing did not adjust the
of the bond upwards towards par, assuming the accrued income was
debt
instruments
rule:
The IRSBeginning
requires with
Pershing
assume in
that
the Pershing
election
interest payment for this amortization. Under the new rules, Pershing Default
being paid
annually.
new to
purchases
2014,
Alternative
Election:
Pershing
will
not
amortize
the
bond
premium
on
has
not
been
made
to
include
market
discount
as
income
it
will supply the IRS with the amount of amortized bond premium on
is no longer permitted to assume this election has been made andaswill
taxable
debt
instruments.
and
will not
the yearly
accruals tobonds
the IRScovered
as additional
purchases
after
January 1, 2014 unless the client elects not to amortize accrues
no longer
adjust
thereport
cost basis
on discounted
under
ordinary
income.
the bond premium.
this election.
Election 2 – Market Discount Accrual Method
Election:
Pershing
required
accruals
of
Default rule: The IRS requires Pershing to assume that you HAVE Alternative
If this election
is made,
cost will
basisbewill
show to
as report
adjusted
and the
(IRC
section 1276[b][2])
as additional
income
the IRS
on Forms
made this election and will amortize the bond premiums on taxable market
accrueddiscount
income will
be reportedordinary
to the IRS
on an to
annual
basis.
There
are two different methods you can use to calculate accruals on 1099 each year the election is in effect.
debt instruments
Default rule: The IRS requires Pershing to assume that the election
market discount:
Alternative Election: Pershing will not amortize the bond premium on
has not been made to include market discount as income as it
Ratable
(Straight
line): This method simply calculates accruals by
taxable debt
instruments.
accrues and will not report the yearly accruals to the IRS as additional
dividing the discount by the number of years until the bond matures.
ordinary income.
As an example, a bond purchased at $95.00 with a remaining maturity
Election
2 –
Market
Discount
Accrual
Method
Alternative Election: Pershing will be required to report accruals of
of five years would simply accrue $1.00 of market discount per year.
(IRC section 1276[b][2])
market discount as additional ordinary income to the IRS on Forms
Constant
Yielddifferent
is a more
complex
calculation
which accruals
takes into
There are two
methods
you can
use to calculate
on 1099 each year the election is in effect.
consideration
the value of money over time. For the same bond
market discount:
purchased at $95.00 accruals would vary, weighted slightly heavier at
Ratable
This Based
method
calculates
accruals
the
end of(Straight
the life ofline):
the bond.
on simply
the yield,
it may accrue
$.95 by
in
dividing
the
discount
by
the
number
of
years
until
the
bond
matures.
year 1 and $1.05 in the final year.
As an example, a bond purchased at $95.00 with a remaining maturity
In
has assumed
the client
has discount
made theper
constant
of the
five past,
years Pershing
would simply
accrue $1.00
of market
year.
yield election. For bonds purchased in 2015, the default will be the
Constantyield
Yield
is a more complex calculation which takes into
constant
method.
consideration the value of money over time. For the same bond
Default
rule:
IRS accruals
requires would
Pershing
to weighted
assume that
the client
has
purchased
at The
$95.00
vary,
slightly
heavier
at
made
the
calculate
accruals
using
a constant
yield
the end
of election
the life ofand
the will
bond.
Based on
the yield,
it may
accrue $.95
in
method
as $1.05
provided
in IRC
year 1 and
in the
finalsection
year. 1276(b)(2).
Alternative
Election: has
Pershing
willthecompute
of constant
market
In the past, Pershing
assumed
client hasaccruals
made the
discount
using
a
ratable
method
rather
than
a
constant
yield
method
yield election. For bonds purchased in 2015, the default will be the
as
provided
in IRC
section 1276(b)(1).
constant
yield
method.
Default rule: The IRS requires Pershing to assume that the client has
made the election and will calculate accruals using a constant yield
method as provided in IRC section 1276(b)(2).
Alternative Election: Pershing will compute accruals of market
discount using a ratable method rather than a constant yield method
as provided in IRC section 1276(b)(1).
© 2015 Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of
The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.
PAGE 1 OF 2
FRM-CLIENT-BOND-ELECT-04-15
Debt Instrument Election and Accrual Method Update
This form is designed to notify a broker of the elections or revocations you have made directly with the IRS.
Please consult with your tax advisor and check all appropriate boxes. Notifications are retroactive to January 1 of
the year the notification is received. If a notification is received after December 31, it will be applied beginning in
the year that it is received.
STEP 1. ACCOUNT INFORMATION
Account Number
4 M V
4 M V
—
4 M V
Account Number
4 M V
—
Account Number
Account Number
4 M V
ALL ACCOUNT
NUMBERS LISTED
MUST USE SAME TAX
ID NUMBER.
Account Number
—
—
Tax ID Number (optional)
—
STEP 2. SELECT ELECTIONS OR REVOCATIONS
Election 1 – Bond Premium Amortization (Internal Revenue Code [IRC] section 171)
Yes/IRS Default: The default assumes the client has made the election to amortize any
bond premium on taxable bonds.
No/Alternative: Pershing will not amortize the bond premium on taxable bonds.
Election 2 – Market Discount Accrual Method (IRC section 1276[b][2])
Ratable/Alternative: Compute accruals of market discount using the ratable method.
PER IRS RULES, ALL
PREMIUM ON TAXEXEMPT BONDS WILL
BE AMORTIZED USING
A CONSTANT YIELD
TO THE WORST CALL
DATE REGARDLESS OF
SELECTION.
Constant Yield/IRS Default: The default is to accrue market discount using a constant yield method.
Election 3 – Include Market Discount as Income (IRC section 1278[b])
Yes/Alternative: Include market discount in income.
No/IRS Default: The default is to not include accrued market discount annually.
STEP 3. SIGNATURE
Due to the complexity of these bond elections and accrual methods, you are encouraged to consult your tax
professional to determine what methods best meet your tax situation. By signing this form you are notifying your
broker of the elections you have either made in the past or elections and/or revocations you will be making for all
applicable covered bonds. Election notifications will be applied to all applicable covered bonds in the account during
the calendar year the notification becomes effective and will be applied to all applicable covered bonds acquired in
the account in future years.
Primary Account Holder Signature
Print Name
Date
—
—
—
—
Signature
X
Additional Account Holder Signature
Print Name
Date
Signature
X
BELF
American Century Brokerage, a Division of American Century Investment Services, Inc., Member SIPC
®
© 2015 Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of
©2015
American
Century
Inc. All Rights
The
Bank
of New
YorkProprietary
MellonHoldings,
Corporation
(BNYreserved.
Mellon).BK-FRM-86234
Trademark(s)1506
belong to their respective owners.
PAGE 2 OF 2
FRM-CLIENT-BOND-ELECT-04-15