Question

If a taxpayer purchases taxable bonds at a premium, the amortization of the premium is elective. However, if a taxpayer purchases tax-exempt bonds at a premium, what is the treatment of the premium?

A) The amortization of the premium is elective.
B) The amortization of the premium is not allowed.
C) The premium is deductible as an expense.
D) The premium is added to the basis of the tax-exempt bonds.

Answer 1

If a taxpayer purchases tax-exempt bonds at a premium, the premium is added to the basis of the tax-exempt bonds.

Step-by-step explanation:

If a taxpayer purchases tax-exempt bonds at a premium, the treatment of the premium is that it is added to the basis of the tax-exempt bonds. This means that the premium paid for the bonds increases the taxpayer's cost or investment in the bonds, which can affect the tax consequences when the bonds are sold or redeemed.