My accountant says that if you purchase a bond with accrued interest you
deduct the accrued interest from interest on Schedule B if the interest is
paid in the same year as the purchase. If the interest is paid in the
following year it is ignored. In neither case does it affect the cost
basis.
Is that correct?
I would think that you would have to add accrued interest to Schedule B when
you sell a bond if the interest would be paid in the sale year, but that is
just a guess. Is it a correct guess?
If you can refer me to a good explanation of all this, that would be great.

What I did for my case is subtract the accrued interest in the year I
received the first interest payment. So if I bought a bond on 1/
December/2007, and the bond makes payments in 1/March and 1/September,
and each interest payment is $600, and the accrued interest was $200,
then I on my 2008 return I would write on Schedule B "Interest $600",
and "Accrued Interest -$200", and the total would be $400.
If I took the accrued interest on my 2007 return, then the total
interest on Schedule B would be $-200, which looks kind of odd.
However, I think that is the correct thing to do. If your net income
taxable income on page 2 of the 1040 is negative then I imagine you
have a NOL carryover.
No, the effect of accrued interest is to lower your first interest
payment. It's as if instead of paying you 4 months interest, they pay
you the usual 6 months interest, but you paid 2 months interest to the
person you bought the bond from.
If you sell a bond, then it seems the accrued interest you receive
would go on Scheulde B. The capital gain on Schedule D is the sale
price of the bond without the accrued interest added (ie. just the
principal), and the purchase price is the cost of the bond without the
accrued interest added (ie. just the principal).

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