Instructions for Form 8866 (09/2005)

What's New

Form 8866 is not being revised at this time. Continue to use the November 2002 revision of Form 8866 in conjunction with these updated instructions.
The tax rates used for the interest computation have changed. See the instructions for line 6 on page 3.

Purpose of Form

Use Form 8866 to figure the interest due or to be refunded under the look-back method of section 167(g)(2) for property placed in service after September 13, 1995, that is depreciated under the income forecast method as described in section 167(g).

The income forecast method generally is limited to depreciation of:

Motion picture films,
Video tapes,
Sound recordings,
Copyrights,
Books, and
Patents.

Who Must File

General Rule

You generally must file Form 8866 to figure interest under the look-back method for each recomputation year for property placed in service after September 13, 1995, that you depreciate under the income forecast method.

Exception. The look-back method does not apply for any property that had an unadjusted basis (total capitalized cost) of $100,000 or less at the end of the recomputation year.

Recomputation Year

A recomputation year is generally the 3rd and 10th tax years after the tax year in which the property was placed in service.

Exception. A tax year is not a recomputation year for the property if, for each year before the recomputation year, the actual income from the property is within 10% of the estimated income taken into account in determining the depreciation deduction for the property under the income forecast method.

Additional Costs

Any costs incurred after the property was placed in service (that is not treated as separate property—see below) is taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time the cost was incurred) the cost to its value as of the date the property was placed in service. However, you may elect not to apply this discounting rule to any property.

Separate property. The following costs are treated as separate property.

Any costs incurred related to any property after the 10th tax year after the tax year the property was placed in service.
Any other costs incurred if they are significant and give rise to a significant increase in the income from the property which was not included in the estimated income from the property.

Pass-Through Entities

A pass-through entity (partnership, S corporation, or trust) that is not closely held must apply the look-back method at the entity level to any property for which substantially all of the gross income is from U.S. sources. A pass-through entity is considered closely held if, at any time during any tax year for which there is income related to the property, 50% or more (by value) of the beneficial interests in the entity is held (directly or indirectly) by or for five or fewer persons. For this purpose, rules similar to the constructive ownership rules of section 1563(e) apply.

If you are an owner of an interest in a pass-through entity for every year in which any property was depreciated under the income forecast method and the entity is not subject to the look-back method at the entity level for that property, you must file this form for your tax year that ends with or includes the end of the entity's recomputation year. The pass-through entity will provide on Schedule K-1 the information you need to complete this form.

Change of Taxpayer

If the taxpayer deducting depreciation under the income forecast method changes prior to the recomputation year, the taxpayer as of the end of the recomputation year will be responsible for the payment of interest, if any, due for any year in which the property was depreciated under the income forecast method. Generally, only the taxpayer that had depreciated property under the income forecast method in a year that an overpayment occurred may request a refund of interest on the overpayment.

Filing Instructions

Interest You Owe

If you owe interest, or no interest is to be refunded to you, attach Form 8866 to your income tax return. Neither you nor any paid preparer is required to complete the Signature section on Form 8866.

For taxpayers other than partnerships (that are not electing large partnerships), include any interest due in the amount to be entered for total tax (after credits and other taxes) on your return (for example, 2002 Form 1040, line 61; 2002 Form 1120, Schedule J, line 11, etc.). Next to the entry space, write “From Form 8866” and the amount of interest due.

For partnerships (other than electing large partnerships), write “From Form 8866” and any interest due in the bottom margin of the tax return, and attach a check or money order for the full amount payable to “United States Treasury.” Write the partnership's employer identification number (EIN), daytime phone number, and “Form 8866 Interest” on the check or money order.

Interest To Be Refunded

If interest is to be refunded to you, do not attach Form 8866 to your income tax return. Instead, file Form 8866 separately with the IRS at the applicable address listed below.

Individuals:

Philadelphia, PA 19255-0001
All others:

Cincinnati, OH 45999-0001

Complete the Signature section on Form 8866 following the instructions for the Signature section of your income tax return. A paid preparer must also complete the Signature section. If additional Forms 8866 are needed (to show more than 3 prior tax years), sign only the first Form 8866.

File Form 8866 by the date you are required to file your income tax return (including extensions). Keep a copy of Form 8866 and any attached schedules for your records.

Filing a Corrected Form 8866

You must file a corrected Form 8866 only if the amount shown on line 6 for any prior year changes as a result of an error you made, an income tax examination, or the filing of an amended tax return.

When completing line 1 of the corrected Form 8866, follow the instructions on the form but do not enter the adjusted taxable income from line 3 of the original Form 8866. When completing line 5 of the corrected Form 8866, do not include the interest due, if any, from line 10 of the original Form 8866 that was included in your total tax when Form 8866 was filed with your tax return.

If both the original and corrected Forms 8866 show interest you owe, file an amended income tax return following the filing instructions on page 1 and the amended return instructions for your tax return.
If both the original and corrected Forms 8866 show interest to be refunded to you, write “Amended” in the top margin of the corrected Form 8866, and file it separately following the filing instructions beginning on page 1.
If your original Form 8866 shows interest you owe and the corrected Form 8866 shows interest to be refunded to you, you must:
1. File an amended tax return showing $0 interest from Form 8866 and
2. File the corrected Form 8866 separately (but do not write “Amended” at the top of the form because this is the first Form 8866 that you will file separately for this recomputation year). Follow the filing instructions beginning on page 1 and the amended return instructions for your tax return.
If the original Form 8866 shows interest to be refunded to you and the corrected Form 8866 shows interest you owe, you must:
1. File the corrected Form 8866 separately (with “Amended” written at the top) showing $0 interest to be refunded and
2. File an amended income tax return and attach a copy of the corrected Form 8866. Follow the filing instructions on page 1 and the amended return instructions for your tax return.

Attachments

If you need more space, attach separate sheets to the back of Form 8866. Put your name and identifying number on each sheet.

General Instructions