CPAs Should Brush up on the "De Minimis" Rule

The de minimis rule doesn't come into play very often. Since it only rears its head when bond prices have fallen significantly, most CPAs probably haven't even thought of it since 1994. But after looking at this year's bond market, it may be time to familiarize ourselves with the rule for the upcoming tax season.

According to Merrill Lynch [1], municipal bond prices have decreased more than eight percent this year. With some investors buying bonds at prices that are less than par, it's time to look at what is and what isn't tax exempt.

The de minimis rule is based on "yield to maturity" and the capital gain threshold. The IRS rule for this threshold is unofficially known as the "de minimis exemption from ordinary income." The de minimis cutoff is 0.25 percentage points per year.

The bond market tends to adjust to this rule, which makes bonds that pass the de minimis threshold experience an additional drop in price. So you may want to warn your clients who are buying bonds at these low prices to consider the tax bill that could be associated with their bargain-basement deal.