1099 INT Interest shortfall on contingent payment debt

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In most cases, this shortfall would be reported as a negative adjustment to OID on the Schedule B Interest Income Smart Worksheet, Section E Adjustment Information. However, if the shortfall is more than the current year interest accrual, you may need to analyze the underlying investment and the historical OID accrual.

Analyzing an Interest Shortfall on Contingent Payment Debt is a three-step process to apply the shortfall to current or cumulative OID.

Step 1: Offset current year interest: First reduce the interest that would normally accrue for the current tax year. If the shortfall is smaller than the current year accrual, enter a negative adjustment to OID interest income on the Schedule B Worksheet as noted above; no further entries are needed. See this article for exact steps: Entering Form 1099-OID in ProSeries.

Step 2: Report ordinary loss: If the negative adjustment is greater than the current year interest accrual, the excess is treated as an ordinary loss. However, you can't deduct more shortfall loss than you have previously reported as income.

Step 3: Carryforward: Any remaining shortfall that was not used as an offset or reported as ordinary loss is carried forward as a negative adjustment to be used in this three-step process each year.