Schedule B, OID is creating negative interest & dividend income

[bertsetseg]

I received the following error message on a return. "Schedule B, total interest and total ordinary dividends must be greater than zero for e-file purposes. This return will need to be filed as a conventional return." 

Because the client's Form 1099 OID has "Original Issue Discount" which is more than their interest and dividend income. 

My questions are:

1. Can the 1099 OID (assuming this is a loss) create a negative income? Is this allowed?

2. If the Schedule B needs to have the negative amount, can I still E-file this return by somehow overriding the warning message? 

Thank you very much for your insight! 

[itonewbie · Accepted solution]

OID is the discount that's accrued as interest income.  That's positive.

It sounds like you have entered the OID as a premium instead, which is a negative offset.

You may like to review your input.

[bertsetseg]

Hi itonewbie,

Thank you for answering. I think you are right. For my education purposes, I would like to understand, is it correct then, that the OID is still need to be entered as accrued interest--earned interest, even when  the value of the treasury was lower than the cost? I was told by the client that they have suffered mark to market losses (but haven't sold the instrument), and I am reading on "Publication 1212 (01/2022), Guide to Original Issue Discount (OID) Instruments" that you don't enter those as interest in the event of market discount? Here is the excerpt made me think that: 

"Market discount.

An OID debt instrument generally has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument’s issue price plus the total OID that accrued before you acquired it. In general, a debt instrument is purchased in the secondary market at a market discount when the value of the debt instrument has decreased since the instrument’s issue date (for example, because of an increase in interest rates). An OID debt instrument has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument's issue price plus the total OID that accrued before you acquired it. The market discount is the difference between the issue price plus accrued OID and your adjusted basis."

[itonewbie]

OID is what your client has, if that's what is reported on the 1099.  That represents the accrued interest related to the period of his holding during the year based on the original issuance.

When the bonds are sold in the secondary market at a deeper discount, at a price that's lower than the original issue price plus the OID accrued to date, the buyer would essentially be receiving more interest than the OID upon redemption; that market-driven component is what you call market discount.  Since it has the same character as OID, it is treated the same way as interest income.

What your client has is a paper loss.  Just like someone holding stocks, you can't recognize a loss until that loss is realized (forget about MTM for now).  The sale of the discounted bonds would then be a separately reportable transaction.