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0x Protocol
|
# 0x (ZRX) Protocol: What It Meant and How It Worked
## What Was the 0x (ZRX) Protocol?
The 0x (zero x) protocol enabled the peer-to-peer exchange of assets on the Ethereum blockchain. It was launched in 2017 by ZeroEx Labs, an organization based in San Francisco. The protocol itself was not, by the developer's definition, a decentralized exchange; it allowed for the creation of decentralized exchanges that can be used in broad applications.
However, the Commodities and Futures Trading Commission disagreed—it shut down the 0x protocol in September 2023 for operating as an unregistered exchange, and its developers were fined $200,000.
### Key Takeaways
* The 0x protocol was an open protocol that enabled the peer-to-peer exchange of assets on the Ethereum blockchain.
* The 0x protocol was open source and managed by the 0x decentralized autonomous organization.
* The 0z protocol was shut down, and as of June 26, 2024, it is no longer maintained.
## The History of 0x (ZRX) Protocol
0x was founded by Will Warren and Amir Bandeali in 2017, who launched an initial coin offering in 2017. The ICO was a success, raising $24 million and another $85 million between two fundraising rounds between 2021 and 2022.
The secondary protocol was created on Ethereum to act as a settlement layer for trading ERC 20 tokens. ERC 20 tokens are fungible (exchangeable) tokens that follow the standards set by Ethereum Request for Comment 20.
In 2021, 0x launched the 0x Decentralized Autonomous Organization (DAO), the organization that would allow participants to govern the progress of the project.
But in September 2023, the Commodities and Futures Trading Commission filed and settled charges against ZeroEx, Inc, along with two other digital asset exchanges, Opyn, Inc, and Deridex. Charges included failing to register as a futures commission merchant, failing to register as a swap execution facility, and illegally offering leveraged and margined retail commodity transactions.
ZeroEx was ordered to pay $200,000 in fines and cease operating as an exchange. As of June 26, 2024, the project community was very small, and the 0x Project's Reddit page had been abandoned.
As of this writing, 0x (the ZRX token) had a market cap of $307.6 million and a 24-hour trading volume of $10.5 million. It had a circulating supply of 847.5 million ZRX.
## How the 0x (ZRX) Protocol Worked
The protocol set up a system of makers, takers, and relayers. Makers were the users who placed orders on the exchange proxy and waited for a match (providing liquidity). Takers placed orders that were immediately matched (removing liquidity). Relayers were network participants who maintained the order book, acting similarly to an exchange.
The 0x protocol’s message format was composed of a set of data fields that carried vital information, such as the digital asset or token to be traded, the price value of the transaction, the expiration time, and the defined identities of the transacting parties.
Smart contracts took care of the necessary business logic for generating, sending, receiving, and processing the data linked to the trading activity. ZRX was 0x’s native governance and staking token. ZRX owners had a say in how the protocol evolved, and token holders could also stake their tokens to earn ETH (the Ethereum token ether) liquidity rewards.
## The Future of 0x (ZRK)
0x's future is somewhat unclear, as its market cap and price have continued a general downward trend since its introduction. Having been shut down by regulators in 2023, the protocol and its few remaining fans don't have many options unless it transitions from exchange services or registered with the CFTC.
## What Is the 0x Protocol?
0x was a protocol for the Ethereum blockchain. It facilitated peer-to-peer exchanges of assets built using Ethereum. The project was shut down by the CFTC for operating as an unregistered exchange and abandoned by its developers.
## What Is a 0x Exchange Proxy?
A 0x exchange proxy was an entity that allowed applications to be developed using the protocol.
## What Is the Price Prediction for 0x Protocol?
Although the project has been abandoned, there is still ZRX trading activity. However, as there is no active development, ZRX is likely to continue to decline in market value.
## The Bottom Line
The 0z protocol allowed users to exchange assets using the Ethereum blockchain. In 2023, the CFTC shut it down for operating as an unregistered exchange.
_The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our [warranty and liability disclaimer](https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1719413657792838&usg=AOvVaw0D_UGuH-JIbePg6j211pnx) for more info. As of the date this article was written, the author does not own ZRX._
> **Article Sources**
>
> 1. ICODrops. "[0x ZRX](https://icodrops.com/0x/)."
>
> 2. 0x Protocol. "[Introducing the 0x DAO](https://forum.0xprotocol.org/t/introducing-the-0x-dao/731)."
>
> 3. Commodities Futures Trading Commission. "[CFTC Issues Orders Against Operators of Three DeFi Protocols for Offering Illegal Digital Asset Derivatives Trading](https://www.cftc.gov/PressRoom/PressReleases/8774-23)."
>
> 4. Reddit. "[r|0xProject](https://www.reddit.com/r/0xProject/comments/1bdatc1/this_subreddit_not_actively_monitored_links_for/)."
>
> 5. 0xProtocol. "[Forum](https://forum.0xprotocol.org/)."
>
> 6. CoinMarketCap. "[0x Protocol (ZRX)](https://coinmarketcap.com/currencies/0x/)."
>
> 7. Github. "[0x Project | Whitepaper](https://github.com/0xProject/whitepaper/blob/master/0x_white_paper.pdf)," Page 6.
|
1%/10 Net 30
|
# What Does 1%/10 Net 30 Mean in a Bill’s Payment Terms?
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*— Paige McLaughlin / Investopedia*
> **Definition**
>
> The 1%/10 net 30 payment term offers a 1% discount to payees if they're willing to pay an invoice within the first 10 days of a 30-day payment period.
## What Is 1%/10 Net 30?
1%/10 net 30 is a payment term used to incentivize a payor to pay an invoice early to capture a [cash discount](https://www.investopedia.com/terms/c/cash-discount.asp) on purchases. This means that if the bill is paid within 10 days, a 1% discount will be applied to the purchase price. Otherwise, the full total amount is due within 30 days.
### Key Takeaways
* A 1%/10 net 30 deal contains two payment terms: a potential price discount for early payment and more general payment due terms.
* 1%/10 means a payee can take a 1% discount on services or products as long as they are paid within 10 days.
* At the same time, the payee must make payment on the invoice within 30 days, regardless whether they opt to make early payment or not.
* The cost of credit is used as a percentage and occurs when the buyer does not take the reduced cost, thus paying the higher cost, reflecting the discount loss.
* A vendor may offer incentives to pay early to accelerate the inflow of cash, which is especially important for businesses with no revolving lines of credit.
## Understanding 1%/10 Net 30
The 1%/10 net 30 calculation represents the [credit](https://www.investopedia.com/terms/c/credit.asp) terms and payment requirements outlined by a seller. The [vendor](https://www.investopedia.com/terms/v/vendor.asp) may offer incentives to pay early to accelerate the inflow of cash. This is particularly important for cash-strapped businesses or companies with no revolving [lines of credit](https://www.investopedia.com/terms/l/lineofcredit.asp). Companies with higher [profit margins](https://www.investopedia.com/terms/p/profitmargin.asp) are more likely to offer cash discounts.
Although the numbers are always interchangeable across vendors, the standard structure for offering a payment discount is the same. The first number will always be the percentage discount. This figure will indicate the total percentage discount on the invoice prior to shipping or taxes that may be discounted upon early payment.
## Special Considerations
Discount terms like 1%/10 net 30 are virtual [short-term loans](https://www.investopedia.com/terms/s/shorttermdebt.asp). This is because if the discount is not taken, the buyer must pay the higher price as opposed to paying a reduced cost. In effect, the difference between these two prices reflects the discount lost, which can be reported as a percentage. This percentage is called the cost of credit.
When the credit terms are 1%/10 net 30, the net result becomes, in essence, an [interest](https://www.investopedia.com/terms/i/interest.asp) charge of 18.2% upon the failure to take the discount.
> **Fast Fact**
>
> Companies with higher profit margins are more likely to offer cash discounts.
The [accounting](https://www.investopedia.com/terms/a/accounting.asp) entry for a cash discount taken may be performed in two ways.
The gross method of purchase discounts assumes the discount will not be taken and will only input the discount upon actual receipt of payment within the discount period. Therefore, the entire amount of receivable will be [debited](https://www.investopedia.com/terms/d/debit.asp). When payment is received, the receivable will be credited in the amount of the payment and the difference will be a credit to discounts taken.
The alternative method is called the net method. For a discount of 1%/10 net 30, it is assumed that the 1% discount will be taken. This results in a receivable being debited for 99% of the total cost.
## Example of 1%/10 Net 30
For example, if “$1,000 - 1%/10 net 30” is written on a bill, the buyer can take a 1% discount ($1,000 × 0.01 = $10) and make a payment of $990 within 10 days, or pay the entire $1,000 within 30 days.
> **Important**
>
> If the invoice is not paid within the discount period, no price reduction occurs, and the invoice must be paid within the stipulated number of days before late fees may be assessed.
The second number is always the number of days of the [discount period](https://www.investopedia.com/terms/d/discounting.asp). In the example above, the discount period is 10 days. Finally, the third number always reflects the invoice due date.
## What Does 1%/10 Net 30 Represent?
The 1%/10 net 30 calculation represents the credit terms and payment requirements outlined by a seller. The vendor may offer incentives to pay early to [accelerate the inflow of cash](https://www.investopedia.com/articles/personal-finance/061215/10-ways-improve-cash-flow.asp).
## Is 1%/10 Net 30 a Loan?
Yes. Discount terms like 1%/10 net 30 are virtual short-term loans. If the discount is not taken, the buyer must then pay the higher price as opposed to paying a reduced cost.
## What Do the Numbers in a 1%/10 Net 30-type Calculation Stand for?
The first number is always the percentage of the discount. The second number is always the number of days of the discount period. The third number always reflects the invoice due date.
## The Bottom Line
The 1%/10 net 30 calculation provides cash discounts on purchases. If the bill is paid within 10 days, there is a 1% discount. Otherwise, the total amount is due within 30 days.
|
10-K
|
# 10-K: Definition, What's Included, Instructions, and Where to Find It
> **Definition**
>
> Form 10-K is a required annual filing where a company details its financial situation and circumstances for the prior year.
## What Is Form 10-K?
Form 10-K is an annual financial report that publicly-traded companies must file with the [U.S. Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp). Some of the data required in a 10-K includes the company's history, organizational structure, financial statements, earnings per share, subsidiaries, executive compensation, and other relevant data.
### Key Takeaways
* The 10-K is required by the U.S. Securities and Exchange Commission (SEC) and is far more detailed than the annual report.
* Information in the 10-K includes corporate history, financial statements, earnings per share, and any other relevant data.
* The 10-K is a useful tool for investors to make important decisions about their investments.
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*A company's Form 10-K can be found on the SEC's EDGAR database and on the company's investor relations website. — Investopedia / Yurle Villegas*
## Understanding Form 10-K
Because of the depth and nature of the information they contain, [10-Ks](https://www.investopedia.com/articles/fundamental-analysis/09/form-10k.asp) are fairly long and tend to be complicated. But [investors](https://www.investopedia.com/terms/i/investor.asp) need to understand that this is one of the most comprehensive and most important documents a public company can publish on a yearly basis. The more information they can gather from the 10-K, the more they can understand the company. Canadian companies will file [SEC Form 40-F](https://www.investopedia.com/terms/s/sec-form-40-f.asp) to provide this information.
The government requires companies to publish 10-K forms so investors have accurate information and can make informed investment decisions. This form gives a clearer picture of everything a company does and what kinds of risks it faces.
> **Important**
>
> Most companies publish their 10-Ks and other required filings on the Investor Relations section of their website. You can also find them using the company search function through the SEC's EDGAR database.
The 10-K includes five distinct sections:
* **Business**. This provides an overview of the company’s main operations, including its products and services (i.e., how it makes money).
* **Risk factors**. These outline any and all risks the company faces or may face in the future. The risks are typically listed in order of importance.
* **Selected financial data**. This section details specific financial information about the company over the last five years. This section presents more of a near-term view of the company’s recent performance.
* **Management’s discussion and analysis** of financial condition and results of operations. Also known as [MD&A](https://www.investopedia.com/terms/m/mdanalysis.asp), this gives the company an opportunity to explain its business results from the previous fiscal year. This section is where the company can tell its story in its own words.
* **Financial statements and supplementary data**. This includes the company’s audited financial statements including the income statement, [balance sheets](https://www.investopedia.com/terms/b/balancesheet.asp), and statement of cash flows. A letter from the company’s independent auditor certifying the scope of their review is also included in this section.
A 10-K filing also includes signed letters from the company’s chief executive officer and chief financial officer. In it, the executives swear under oath that the information included in the 10-K is accurate. These letters became required after several high-profile accounting fraud cases followed the dot-com bust.
## 10-K Filings and Deadlines
10-K filings are public information and readily available through a number of sources. In fact, the vast majority of companies include them in the [Investor Relations](https://www.investopedia.com/terms/i/investorrelations.asp) section of their website. The information included in a 10-K can be difficult to move through, but the more familiar investors become with the layout and the type of information included, the easier it is to identify the most important details.
Filing deadlines for the 10-K vary based on the size of the company. According to the SEC, companies with a public [float](https://www.investopedia.com/terms/f/float.asp)—shares issued to the public that are available to trade—of $700 million or more must file their 10-K within 60 days after the end of their fiscal year. Companies with a float between $75 million and $700 million have 75 days, while companies with less than $75 million in their float have 90 days.
## Purpose of Form 10-K
The primary purpose of filing a Form 10-K is to provide comprehensive, transparent information about how a company is doing. Because this information is useful to a variety of people, the SEC requires certain information to be presented in a certain way. At a very high level, it’s fair to say Form 10-K’s purpose can be broken down into the following five categories (which slightly overlap but are more high-level than the five categories listed above):
* **Transparency**: It offers [transparency](https://www.investopedia.com/terms/t/transparency.asp) into a company's financial health, including its financial statements, risks, and opportunities.
* **Disclosure**: It requires companies to disclose relevant information about their business operations, management, and financial condition, helping stakeholders make informed decisions.
* **Compliance**: It ensures [compliance](https://www.investopedia.com/terms/c/compliancedepartment.asp) with SEC regulations and provides a standardized format for reporting financial information, promoting consistency and comparability among companies.
* **Accountability**: It holds company management accountable to shareholders by providing a detailed overview of the company's performance and strategic direction.
* **Investor Confidence**: It helps build investor confidence by demonstrating the company's commitment to transparency and corporate governance practices.
> **Fast Fact**
>
> Form 10-K is prescribed by the 1934 Securities Exchange Act.
## Who Files Form 10-K
Form 10-K is required to be filed by all [publicly traded companies](https://www.investopedia.com/terms/p/publiccompany.asp) in the United States. This requirement applies to companies listed on U.S. stock exchanges such as the New York Stock Exchange. The SEC imposes this filing requirement to ensure transparency and accountability in the financial markets, allowing investors and other stakeholders to access relevant information about the company's operations, financial condition, and performance.
The filing of Form 10-K is not limited to [large corporations](https://www.investopedia.com/terms/l/large-cap.asp); it applies to companies of all sizes that meet the criteria for being publicly traded. This includes both domestic and foreign companies whose securities are listed on U.S. exchanges or are registered with the SEC. Additionally, certain smaller reporting companies may file a streamlined version of the Form 10-K, known as Form 10-KSB or Form 10-KT. Note that in order to file this alternative version, a company has to meet some eligibility requirements.
> **Fast Fact**
>
> Form 10-K is only used for U.S. companies trading on U.S. exchanges. If a foreign company lists its shares on a U.S. exchange, it files Form 20-F.
## Penalties for Form 10-K Noncompliance
There are penalties for not filing a Form 10-K on time. These penalties can vary depending on the severity of the violation and the circumstances surrounding the late filing. In most cases, companies pay a fee for non-compliance.
Failure to file required periodic reports can result in the loss of good standing with stock exchanges and other regulatory bodies. This could lead to delisting from stock exchanges or temporary suspensions of 10 [trading days](https://www.investopedia.com/ask/answers/06/stockexchangeclosed.asp). In addition, the SEC may take legal and regulatory actions against companies that repeatedly fail to meet filing deadlines or comply with disclosure requirements. These actions can include enforcement proceedings, investigations, fines, and sanctions against the company, its officers, directors, or other responsible parties.
On the softer side of the consequences, late or incomplete filings can erode investor confidence and trust in the company's management. Investors may perceive delayed filings as a red flag indicating potential financial problems, lack of transparency, or poor internal controls. There’s little reason for a Form 10-K to be filed late, and investors may (and probably should) be curious about the reasons behind any non-compliance.
## Limitations of Form 10-K
While Form 10-K reports a wealth of useful information, it does have its downsides. These limitations include but aren’t necessarily limited to:
* **Forward-Looking Statements**: Companies often include forward-looking statements in their Form 10-K, which are statements about future expectations, plans, or [financial projections](https://www.investopedia.com/ask/answers/difference-between-financial-forecasting-and-financial-modeling/). These statements are subject to various risks, uncertainties, and assumptions. They may be given in good faith, but this commentary may mislead investors as to what may actually happen.
* **Complexity and Length**: Form 10-K filings are long, complex documents. On one hand, that means it has a wealth of information. On the other hand, it’s easy to lose sight of important information that may get buried. Investors may find it challenging to navigate and interpret the vast amount of information provided in the Form 10-K.
* **Selective Disclosure**: The SEC requires certain information be given in a Form 10-K. However, companies may selectively disclose certain information or present it in a favorable light in their Form 10-K. This means they can control the narrative and potentially omit or downplay negative or unfavorable aspects of their business. Investors should critically evaluate the completeness and objectivity of the information provided.
* **Use of Estimates and Assumptions**: The financial statements and disclosures included in the Form 10-K may be based on management's estimates, assumptions, and judgments. After all, part of [GAAP reporting](https://www.investopedia.com/terms/g/gaap.asp) is based on accounting judgment and financial guesses. These estimates may be subjective and involve inherent uncertainties, meaning things may not always play out how the company is presenting them on the financial front.
* **Regulatory Compliance and Legal Risks**: Companies may face regulatory compliance issues, legal disputes, or other contingencies that are not fully disclosed or adequately addressed in the Form 10-K. This is because companies may choose to not disclose sensitive information, or they may be more defensive in having to disclose this type of information. Investors should consider the potential impact of regulatory and legal risks that may not be fully disclosed.
## Forms 10-Q vs. Form 8-K
Along with the 10-K, the SEC requires that public companies regularly file forms 10-Q and 8-K.
Form 10-Q must be submitted to the [SEC](https://www.investopedia.com/articles/fundamental-analysis/08/sec-forms.asp) on a quarterly basis. This form is a comprehensive report of a company's performance and includes relevant information about its financial position. Unlike the 10-K, the information in the 10-Q is usually unaudited. The company is only required to file it three times a year as the 10-K is filed in the fourth quarter.
Form 8-K is required by the SEC whenever companies announce major events that shareholders should be aware of. These events may include (but aren't limited to) sales, acquisitions, delistings, departures, and elections of executives, as well as changes in a company's status or control, bankruptcies, information about operations, assets, and any other relevant news.
## Form 10-K vs. Annual Report
The Form 10-K and the [annual report](https://www.investopedia.com/terms/a/annualreport.asp) serve distinct purposes and cater to different audiences. The Form 10-K is a regulatory filing mandated by the SEC. On the other hand, the annual report represents a broader communication tool utilized by companies to engage with a wider range of stakeholders. While it often includes Form 10-K as its core financial and regulatory component, the annual report also incorporates additional elements such as narrative descriptions, graphics, photos, and other visually appealing features.
These elements aim to provide a more reader-friendly and engaging format for shareholders, employees, customers, and other stakeholders. For example, companies may have high-quality photographs or graphic designs as part of the introduction to their annual report. The intention is to make the annual report visually attractive to entice readership; Form 10-K is not meant to look nearly as pretty.
Unlike the Form 10-K, which is subject to specific regulatory requirements and accounting standards, the annual report is not bound by such constraints. Instead, it allows companies greater flexibility in crafting a narrative that aligns with their objectives and corporate identity. Through the annual report, companies seek to showcase their accomplishments, [company values](https://www.investopedia.com/terms/m/missionstatement.asp), and vision to stakeholders. In many ways, it’s fair to call an annual report a marketing and communication tool, whereas the Form 10-K is much more of a regulatory compliance document.
## Explain Like I'm Five
If a company wants to sell its stock to the public, it must make certain disclosures and filings so that investors have accurate information and can decide if it's a good investment. One of those filings is SEC Form 10-K, which companies must file every year.
Form 10-K describes the company's business model and possible risk factors. It also describes the company's financial condition, including its debts, liabilities, operational costs, and revenue.
The company's executives must also make a sworn statement that the information in the 10-K is accurate. If they are wrong, they can face penalties.
## What Is Form 10-K?
Form 10-K is a comprehensive annual report filed by publicly traded companies with the U.S. SEC. It provides a detailed summary of the company's financial performance. This form is required by the SEC to ensure transparency and provide investors with essential information to make informed decisions.
## When Is Form 10-K Due?
The due date for Form 10-K depends on the size of the company. Large accelerated filers must file within 60 days after the end of their fiscal year. Other companies with smaller float may file within 75 days or 90 days after their fiscal year.
## Where Can I Find a Company's Form 10-K?
A company's Form 10-K can be found on the SEC's EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database, which is accessible to the public online. Additionally, companies often provide links to their 10-K filings on their investor relations websites.
## How Do I Read a Form 10-K?
Reading a Form 10-K involves understanding its structure and the significance of its various sections. Start with the business overview to get a sense of what the company does. Then, review the risk factors to understand potential challenges. Move onto the MD&A for insights into management’s perspective on financial results, then review the actual financial numbers to understand actual company performance.
## The Bottom Line
Form 10-K is an annual comprehensive report filed by publicly traded companies with the SEC, detailing their financial performance and business operations. It includes audited financial statements, management's discussion and analysis, risk factors, and other important disclosures. This document provides investors and stakeholders with crucial information to assess the company's financial health and is required by regulatory bodies.
> **Article Sources**
>
> 1. Securities and Exchange Commission. "[Using EDGAR to Research Investments](https://www.investor.gov/introduction-investing/getting-started/researching-investments/using-edgar-research-investments)."
>
> 2. Securities and Exchange Commission. "[How to Read a 10-K](https://www.investor.gov/introduction-investing/getting-started/researching-investments/how-read-10-k)."
>
> 3. Securities and Exchange Commission. "[How to Read a 10-K/10-Q](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/how-read)."
>
> 4. Securities and Exchange Commission. "[Testimony Concerning Implementation of the Sarbanes-Oxley Act of 2002](https://www.sec.gov/news/testimony/090903tswhd.htm)."
>
> 5. Securities and Exchange Commission. "[Form 10-K](https://www.investor.gov/introduction-investing/investing-basics/glossary/form-10-k )."
>
> 6. New York Stock Exchange. "[NYSE Regulation](https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_2024_Annual_Guidance_Letter.pdf)."
>
> 7. Securities and Exchange Commission. "[General Instructions](https://www.sec.gov/files/form10-k.pdf)."
>
> 8. Securities and Exchange Commission. "[Form 10-KSB](https://www.sec.gov/Archives/edgar/data/96699/000092701602006084/d10ksb.htm)."
>
> 9. Securities and Exchange Commission. "[SEC Charges Five Companies for Failure to Disclose Complete Information On Form NT](https://www.sec.gov/enforce/34-98192-s)."
>
> 10. Securities and Exchange Commission. "[Investor Bulletin: Delinquent Filings](https://www.sec.gov/investor/alerts/ib-delinquent-filers)."
>
> 11. NASDAQ. "[Rules](https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/nasdaq-5200-series)."
>
> 12. Securities and Exchange Commission. "[Form 10-Q](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/how-read)."
>
> 13. Securities and Exchange Commission. "[Form 8-K](https://www.sec.gov/fast-answers/answersform8khtm.html)."
|
Value Reporting Form
|
# SEC Form 10-Q: Definition, Deadlines for Filing, and Components
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*— Investopedia / Michela Buttignol*
## What Is SEC Form 10-Q?
SEC Form 10-Q is a comprehensive unaudited report of financial performance that must be submitted quarterly by all public companies to the [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp). It stands in contrast to SEC Form 10-K, which is required to be filed annually and is audited.
In the 10-Q, firms are required to disclose relevant information regarding their finances related to their business operations. A 10-Q must be filed for each of the first three quarters of the company's fiscal year.
### Key Takeaways
* SEC Form 10-Q is a comprehensive quarterly report of financial performance submitted by all public companies to the SEC.
* Form 10-Q contains financial statements, management discussion and analysis, disclosures, and internal controls for the previous quarter.
* Companies must file their 10-Qs 40 or 45 days after the end of their quarters, depending on the size of their public float.
* A snapshot of a company's financial position, Form 10-Q provides investors with information they can compare to previous periods and use to evaluate the outlook for the stock's performance.
* Form 10-Q is not an audited statement, unlike the annual Form 10-K that companies are also required to file.
> **Important**
>
> While 10-K reports are due annually and must include audited financial statements, 10-Q reports are due quarterly and are generally unaudited financial statements.
## Understanding SEC Form 10-Q
Federal securities laws mandate that publicly traded companies provide certain information to shareholders and the general public. These [disclosures](https://www.investopedia.com/terms/d/disclosure.asp) may occur periodically or as specific events occur.
A company utilizes Form 10-Q—one of many required by the SEC—upon the completion of each quarter to release unaudited financial statements and give an overview of the company’s financial situation.
The exact filing dates depend on the organization’s fiscal year, but it is necessary to file three 10-Q reports each year. A 10-Q for the final quarter of the year is not required: A company files Form 10-K, an annual report, instead. This report, unlike the 10-Q, is audited and tends to contain more details.
### Note
A company's Form 10-Q is public information. Anyone who wishes to examine a company's quarterly report can go to the SEC's [EDGAR database](https://www.sec.gov/edgar/searchedgar/companysearch). You can search by company name, ticker symbol, or SEC Central Index Key (CIK). Many companies also post their 10-Qs on their websites, in an "Investor Relations" section.
## SEC Form 10-Q Filing Deadlines
The deadline for filing a 10-Q varies and depends on the number of outstanding shares a company has.
A company filing a 10-Q is classified in one of three categories. Its category is determined by its public [float](https://www.investopedia.com/terms/f/float.asp)—that is, the portion of outstanding stock that is in the hands of the public, and not held by officers, owners, or the government. Essentially, the float is comprised of all of a company’s freely traded common stock shares.
The largest companies are classified as large accelerated filers. To fit this classification, an organization must have at least $700 million in public float. Large accelerated filers have 40 days after the close of the quarter to file a 10-Q.
Accelerated filers are companies with at least $75 million in public float but less than $700 million. They also have 40 days to file the 10-Q (they have a little more time to file the 10-K).
Finally, non-accelerated filers are companies with less than $75 million of public float. These companies have 45 days from the end of the quarter to file a 10-Q.
## Failure to Meet the Form 10-Q Filing Deadline
When a company fails to file a 10-Q by the filing deadline, it must make a non-timely (NT) filing of SEC Form [NT 10-Q](https://www.investopedia.com/terms/s/sec-form-nt-10-q.asp).
An NT filing must explain why the deadline has not been met. It includes a request for an additional five days to file.
As long as a company has a reasonable explanation, the SEC allows late filings within a specified time period. Common reasons why companies are not able to file on time include [mergers and acquisitions (M&A)](https://www.investopedia.com/terms/m/mergersandacquisitions.asp), corporate litigation, an ongoing review by corporate auditors, or lingering effects from bankruptcy.
A 10-Q filing is considered timely if it is filed within this extension period. Failure to comply with this extended deadline results in consequences, including the potential loss of the SEC registration, removal from stock exchanges, and legal ramifications.
## Components of SEC Form 10-Q
There are two parts to a 10-Q filing. The first part contains relevant financial information covering the period. This includes condensed financial statements, [management discussion](https://www.investopedia.com/sec-filings-as-a-news-source-11775623), analysis of the financial condition of the entity, disclosures regarding [market risk](https://www.investopedia.com/terms/m/marketrisk.asp), and internal controls.
The second part contains all other pertinent information. This includes legal proceedings, unregistered sales of equity securities, the use of proceeds from the sale of unregistered sales of equity securities, and defaults upon senior securities. The company discloses any other information—and includes exhibits—in this section.
### Note
Form 10-Q, and the requirement for filing it, was established by the [Securities and Exchange Act of 1934](https://www.investopedia.com/terms/s/seact1934.asp). The aim was to promote transparency in public companies' operations by providing investors with the financial position of companies on an ongoing basis.
## Importance of SEC Form 10-Q
The 10-Q provides a window into the financial health of a company. Investors can use the form to get a sense of its quarterly earnings and other elements of its operations and to compare them to previous quarters. Thus, it is a dependable performance-tracking tool.
Some areas of interest to investors that are commonly visible in the 10-Q include changes to working capital and/or accounts receivables, factors affecting a company's inventory, share buybacks, and even any legal risks that a company faces.
You can compare a close competitor's 10-Q to that of a company in which you are invested, or considering whether to invest, to see how its performance stacks up. This will give you an idea of whether it's a strong choice, where its weaknesses are, and how it could improve.
## Other Important SEC Filings
The 10-Q is one of many reports that public companies are required to file with the SEC. Other important and mandated filings include:
**[Form 10-K](https://www.investopedia.com/terms/1/10-k.asp):** The 10-K must be filed once per year and includes the final quarter of the company's performance (replacing a fourth-quarter 10-Q). The 10-K summarizes the year, often contains more detailed information than an annual report, and must be filed within 90 days of the end of a company's fiscal year. It generally includes a summary of the company's operations, management's financial outlook, financial statements, and any legal or administrative issues involving the company.
[**Form 8-K**](https://www.investopedia.com/terms/1/8-k.asp): This report is filed if there are any changes or developments to a business that didn't make the 10-Q or 10-K reports. The 8-K is considered an unscheduled document and may contain information such as press releases. If a company disposes of or acquires assets, has announcements of executive hiring or departures, or goes into receivership, this information is filed with an 8-K.
**[Annual report](https://www.investopedia.com/terms/a/annualreport.asp):** A company's annual report is filed every year, and contains a wealth of company news including—but not limited to—general information about the company, a letter to shareholders from the CEO, financial statements, and an auditors report. This report is submitted a few months after the end of a company's fiscal year. The report is available through a company's website or investor relations team, and can also be obtained from the SEC.
## Are Public Companies Required to File Form 10-Q?
Yes, all U. S. public companies issuing common shares of stock that trade on exchanges are required to file Form 10-Q. The date by which they have to file varies according to the number of shares, expressed in terms of dollar worth, that they have outstanding.
## Who Signs Form 10-Q?
According to the SEC, "At least one complete copy of the report filed with the Commission and one such copy filed with each exchange must be manually signed on the registrant’s behalf by a duly authorized officer of the registrant and by the principal financial or chief accounting officer of the registrant." More information is available in the instructions for Form 10-Q.
## Must Review Reports Accompany Financial Statements in a 10-Q?
10-Qs generally are not audited or accompanied by accountants' reports. SEC regulations prohibit companies from making materially false or misleading statements or omitting material information to make disclosures not misleading. The SEC staff reviews 10-Qs and may provide comments to a company where disclosures appear to be inconsistent with the disclosure requirements or deficient in explanation or clarity.
## The Bottom Line
SEC Form 10-Q is a report filed by public companies and sent to the SEC after the close of each of the first three quarters of every year. The final quarter is covered by SEC Form 10-K, an annual report.
Form 10-Q can be a valuable research tool for investors because it contains a substantial amount of financial data about a company's quarterly performance, as well as information regarding business operations, management discussions, pertinent market risks, and disclosures.
> **Article Sources**
>
> 1. U.S. Securities and Exchange Commission. "[How to Read a 10-K/10-Q](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/how-read)."
>
> 2. U.S. Securities and Exchange Commission, Investor.org. "[Form 10-K](https://www.investor.gov/introduction-investing/investing-basics/glossary/form-10-k)."
>
> 3. U.S. Securities and Exchange Commission, Investor.gov. "[Form 10-Q](https://www.investor.gov/introduction-investing/investing-basics/glossary/form-10-q)."
>
> 4. U.S. Securities and Exchange Commission. "[Form 12b-25: Notification of Late Filing](https://www.sec.gov/files/form12b-25.pdf)."
>
> 5. U.S. Securities and Exchange Commission. "[Form 12b-25: Notification of Late Filing](https://www.sec.gov/files/form12b-25.pdf)." Page 2.
>
> 6. U.S. Securities and Exchange Commission. "[Form 10-Q General Instructions](https://www.sec.gov/files/form10-q.pdf)."
>
> 7. U.S. Securities and Exchange Commission. "[Form 10-Q, General Instructions](https://www.sec.gov/files/form10-q.pdf)."
>
> 8. U.S. Securities and Exchange Commission. "[Fast Answers: How to Read a 10-K/10-Q](https://www.sec.gov/fast-answers/answersreada10khtm.html)."
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10-K Wrap: What It Is, How It Works, Elements
|
# 10-K Wrap: What It Is, How It Works, Elements
> **Definition**
>
> A 10-K wrap is a summary report that combines the performance data from a 10-K report with additional commentary, such as a letter to shareholders and corporate vision statement.
## What Is a 10-K Wrap?
A 10-K wrap is a summary report of a company's annual performance that bundles the [10-K](https://www.investopedia.com/terms/1/10-k.asp) report required by the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) with additional commentary from the company, covering such things as the corporate vision, letter to shareholders, and business overview, among other topics.
The 10-K wrap is often released instead of a traditional annual report and generally contains fewer images and comments from management.
### Key Takeaways
* A 10-K wrap is part of a larger annual performance document required by the SEC.
* The "wrap" is a short commentary covering the more personal side of the business, and usually includes a letter to the shareholders and a corporate vision statement.
* The 10-K wrap report is shorter than a company's annual report.
* While a 10-K wrap (typically) has a lower-value production budget with limited graphics, its cover may be extremely polished by comparison.
* The basic sections of a 10-K wrap summarize the company's financial status, plus an overview of the company's financial plans for upcoming quarters.
* Usually, a 10-K wrap provides debt and spending level forecasts, as well.
## Understanding a 10-K Wrap
Form 10-K is a detailed annual report that is required to be submitted to the U.S. Securities and Exchange Commission (SEC). The filing provides a comprehensive summary of a company’s performance for the year. It is more detailed than the annual report that is sent to shareholders during the annual meeting to elect directors. SEC filing 10-K outlines the company’s history, equity, subsidiaries, organizational structure, audited financial statements, and other relevant information.
The most significant difference between the traditional annual report and the 10-K wrap is how the information is presented and how much additional information is included above the required 10-K information.
The traditional annual report has a greater focus on comments from the company, and the document includes more images and graphs to communicate performance, as well as a list of corporate objectives of the company.
By contrast, the 10-K wrap is essentially the 10-K filed with the SEC and some additional editorial from the company—but not nearly as much as the annual report. It usually has a lower production cost because it is often printed on lower-quality paper.
> **Fast Fact**
>
> The 10-K wrap is typically made available in print and digital formats to maximize access for shareholders, investors, and analysts.
## Elements of a 10-K Wrap
The basic elements of a 10-K wrap typically include a summary of the company's financial results for the previous year and an overview of its plans for upcoming quarters, including spending and debt level forecasts.
A 10-K plan can also include an elaborate cover design, with perhaps a theme that focuses on investors and analysts involved in the company's projects for the upcoming year.
Graphics in the 10-K wrap will usually provide a brief overview of the company's financials, including revenue, net profit, costs, income, and any highlights from the previous year. The graphics may also outline the company's geographical reach or other elements of growth.
> **Important**
>
> 10-K: Due Monday, April 18, 2022, for the fiscal year ended on Jan. 31, 2022.10-Q: Due Tuesday, May 10, 2022, for the quarterly period ended on March 31, 2022.
## Special Considerations
As the 10-K wrap has evolved, it has come to include more images and content, such as a shareholder letter and high-quality photographs. However, pictures will often be kept to a minimum.
The 10-K wrap document is usually no more than four pages long and could be even shorter, depending on what company executives want to see from the 10-K wrap report.
> **Article Sources**
>
> 1. Thomson Reuters Practical Law. "[Annual Report to Stockholders](https://content.next.westlaw.com/practical-law/document/I0f9fe720ef0811e28578f7ccc38dcbee/Annual-Report-to-Stockholders?viewType=FullText&transitionType=Default&contextData=%28sc.Default%29&firstPage=true)."
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10-Year Treasury Note
|
# 10-Year U.S. Treasury Note: What It Is and Investment Advantages
> **Definition**
>
> A 10-year U.S. Treasury note is a debt security issued by the U.S. and is a loan made by the investor to the government with a maturity of 10 years from the date it's issued.
## What Is a 10-Year Treasury Note?
The 10-year Treasury note is a debt obligation issued by the U.S. government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate every six months and pays the face value to the holder at maturity. The U.S. government partially funds itself by issuing these notes.
### Key Takeaways
* Treasury notes (T-notes) have maturities of up to 10 years. These can be appropriate for long-term saving or investing.
* You don't necessarily have to hold 10-year T-notes for the entire duration. You can sell them at any time in the secondary market.
* The 10-year T-note is the most widely tracked government debt instrument in finance.
* T-note prices typically move in the opposite direction from major stock market indexes.
## How 10-Year Treasury Notes Work
The U.S. government issues three types of debt securities to fund its obligations: [Treasury bills](https://www.investopedia.com/terms/t/treasurybill.asp), Treasury notes, and Treasury bonds. Bills, bonds, and notes are distinguished by their length of maturity.
Treasury bills (T-bills) have the shortest lengths of time to maturity—one year or less. The Treasury offers T-bills with maturities of four, eight, 13, 26, and 52 weeks. Treasury notes have maturities ranging from one to 10 years. Bonds are Treasury securities with maturities longer than 10 years.
Treasury notes and bonds pay interest at a fixed rate every six months to maturity. They're then redeemed at [par value](https://www.investopedia.com/terms/p/parvalue.asp). The Treasury repays the principal it borrowed.
T-bills are issued at discounts to par, and they don't have coupon payments. The interest on T-bills is the difference between the face value repaid at maturity and the purchase price.
## The 10-Year Note Yield As a Benchmark
The 10-year T-note is the most widely tracked government debt instrument. Its [yield](https://www.investopedia.com/terms/t/treasury-yield.asp) is frequently used as a benchmark for other interest rates, like mortgage and corporate debt. Commercial interest rates don't follow the 10-year yield, however.
The chart below shows the historical 10-year Treasury yield from March 2022 to April 2025. Since March 2022, the 10-year Treasury yield has seen a general upward trajectory, blotted with fluctuations. The upward trajectory is a result of the Federal Reserve increasing interest rates to curb the high [inflation](https://www.investopedia.com/articles/01/021401.asp) experienced after the COVID-19 pandemic.
The interest rate set by the Fed increased from a range of 0.25% and 0.50% in March 2022 to a range of 5.25% and 5.50% in July 2023, with rates only starting to slightly come down in September 2024.
:max_bytes(150000):strip_icc()/Screenshot2025-04-24at11.12.26AM-90f2b2f5b09249bfbda20c84c26e5dc9.png)
**
The yield of the 10-year note went from about 1.7% in March 2022 to a peak of 4.98% in October 2023. As of April 2025, the rate is about 4.4%.
The 10-year note is undoubtedly a highly significant benchmark for global financial markets. A rising yield indicates investor confidence in the economy but also suggests higher borrowing costs, potentially slowing economic growth. Conversely, a falling yield may signal economic uncertainty.
## What Impacts the 10-Year Treasury Yield?
Several factors influence the 10-year Treasury yield. It's directly affected by investor [confidence](https://www.investopedia.com/ask/answers/09/consumer-confidence-sentiment-difference.asp) in the markets. When investors are optimistic about the economy's health, they tend to invest in riskier assets, reducing demand for Treasury notes, causing a need to increase their yield.
Conversely, in times of economic uncertainty, investors often flock to the safety of Treasury notes, driving up their prices and lowering them.
Inflation is another major influence, as we have seen more recently. Higher inflation can decrease the real return on Treasury notes, causing yields to rise as investors demand higher returns to offset the erosion of buying power. Conversely, low inflation can lead to lower yields.
Lastly, the yield is also affected by monetary policy decisions by the Federal Reserve. For instance, when the Federal Reserve chooses to raise interest rates, yields on Treasury notes also tend to increase, reflecting the higher cost of borrowing.
## The Advantages of Investing in Treasury Notes
Fixed-income securities offer important portfolio [diversification](https://www.investopedia.com/terms/d/diversification.asp) benefits because their returns aren't correlated with the performance of stocks.
**T-Notes Are Safe**: Government debt and the 10-year Treasury note, in particular, are considered among the safest investments. Its price often (but not always) [moves inversely](https://www.investopedia.com/articles/fundamental-analysis/09/intermarket-relations.asp) to the trend of the major stock market indexes. Central banks tend to lower interest rates in a recession, which reduces the coupon rate on new Treasuries. This then makes older Treasury securities with higher coupon rates more desirable.
**T-Notes Are Partially Tax-Exempt**: Another advantage of investing in 10-year Treasury notes and other federal government securities is that the coupon payments are exempt from state and local income taxes. They're still taxable at the federal level, however.
**There's No Minimum Holding Term**: Investors can choose to hold Treasury notes until maturity or sell them early in the secondary market. There's no minimum holding term.
## The Disadvantages of Investing in Treasury Notes
Investing in Treasury notes, while considered safe, comes with drawbacks.
**Lower Rate of Return**: Treasury notes can yield less than riskier assets like equity investments or higher-yielding corporate bonds. This makes them potentially less profitable for investors than alternatives.
**Inflation Risks**: During periods of high inflation, fixed-interest payments from Treasury notes can lose purchasing power. If inflation outpaces the yield, the real return can turn negative. If you are holding longer-running notes, you need to ensure you understand how inflation will affect your investment.
**Interest Rate Risk**: An uptick in interest rates could lower the value of existing Treasury notes. This could result in capital losses should you liquidate your holdings before their maturity date.
### Advantages and Disadvantages of Investing in Treasury Notes
Advantages
* Low risk because of government backing
* Easy to buy and sell
* Partially free from state and local taxes
Disadvantages
* Lower yield compared with other investments
* Vulnerability to inflation
* Potential capital loss if sold before maturity
## How to Buy 10-Year Treasury Bonds
The [U.S. Treasury](https://www.investopedia.com/terms/u/ustreasury.asp) sells its notes, bonds, and bills through the TreasuryDirect website. Sales are done through competitive or non-competitive bidding with a minimum purchase of $100, with bidding increasing in $100 increments. Treasury securities can also be bought through a bank or broker.
## How Are T-Notes Issued?
All T-notes are issued electronically, so investors cannot obtain paper certificates. Series I Savings Bonds are the only Treasury securities still issued on paper, and they can only be bought on paper with tax refund proceeds.
## When Are T-Notes Issued?
The Treasury issues new T-notes of shorter maturities every month. However, new 10-year notes are only issued in February, May, August, and November. The Treasury sells additional 10-year notes from the most recent issue in what is known as "reopenings" in other months.
Reopened notes have the same maturity date and coupon interest rate as the original issue, but they have a different issue date and a purchase price that reflects subsequent changes in the market's interest rates.
## Can I Buy Treasury Bills From My Bank?
Yes, you can purchase Treasury bills from many banks, but you may end up paying additional expenses such as sales commissions and other transaction charges. Over time, these fees and expenses can eat into your returns.
## The Bottom Line
A 10-year Treasury note pays interest at a fixed rate twice a year and will pay its face value at maturity. They are issued by the U.S. government and provide low-risk investments, and they're generally tax-exempt at the state and local levels. T-notes can be a good choice for those who prefer not to roll the dice with more iffy investments.
> **Article Sources**
>
> 1. TreasuryDirect. "[Treasury Bills](https://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm)."
>
> 2. TreasuryDirect. "[Treasury Notes](https://www.treasurydirect.gov/indiv/products/prod_tnotes_glance.htm)."
>
> 3. TreasuryDirect. "[Treasury Bonds](https://www.treasurydirect.gov/marketable-securities/treasury-bonds/)."
>
> 4. Board of Governors of the Federal Reserve System. "[Open Market Operations](https://www.federalreserve.gov/monetarypolicy/openmarket.htm)."
>
> 5. St. Louis Fed, FRED Economic Data. "[Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis](https://fred.stlouisfed.org/series/DGS10)."
>
> 6. IRS. "[Topic No. 403, Interest Received](https://www.irs.gov/taxtopics/tc403#:~:text=Interest%20income%20from%20Treasury%20bills,state%20and%20local%20income%20taxes.)."
>
> 7. TreasuryDirect. "[Using Your Income Tax Refund to Buy Paper Savings Bonds](https://www.treasurydirect.gov/indiv/research/faq/faq_irstaxfeature.htm)."
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100% Equities Strategy
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# 100% Equities Strategy: What it Means, How it Works
## What Is a 100% Equities Strategy?
A 100% equities strategy is a strategy commonly adopted by pooled funds, such as a [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp), that allocates all investable cash solely to stocks. Only equity securities are considered for investment, whether they be [listed](https://www.investopedia.com/terms/l/listed.asp) stocks, [over-the-counter](https://www.investopedia.com/terms/o/otc.asp) stocks, or private equity shares.
### Key Takeaways
* A 100% equities strategy involves only long positions in stocks.
* Such a strategy is common among mutual funds that allocate all investable cash solely to stocks, forgoing higher-risk instruments such as derivatives or riskier strategies such as short selling.
* With 100% equity strategies, a portfolio's style can be further subdivided into capital appreciation, aggressive growth, growth, value, capitalization, and income, among others.
## Understanding a 100% Equities Strategy
100% equities strategies represent portfolios that only select investments from the equities (i.e., stocks) universe. 100% equity strategies are predominant in the market and encompass a large majority of offerings.
> **Tip**
>
> Generally, very few funds would be able to deploy all available capital to equity market investments without holding some cash and cash equivalents for transactions and operating activities.
In practice, many 100% equity strategies will have an investment objective or mandate to invest at least 80% in equities. The 80% threshold is a formality used in regulatory or registration documentation for the majority of equity funds in the marketplace, with many funds deploying anywhere from 90% to 100% to equities.
100% equity means that there will be no bonds or other asset classes. Furthermore, it implies that the portfolio would not make use of related products like equity [derivatives](https://www.investopedia.com/terms/d/derivative.asp), or employ riskier strategies such as [short selling](https://www.investopedia.com/terms/s/shortselling.asp) or buying on margin. Instead, 100% equities implies a more focused, traditional approach to equity investment.
## Special Considerations
Equities are generally considered a riskier asset class over alternatives such as [bonds](https://www.investopedia.com/terms/b/bond.asp), money market funds, and cash.
A well-diversified portfolio of all stocks can protect against individual company risk, or even sector risk, but market risks will still persist that can affect the equities asset class. Thus, both systemic and idiosyncratic risks are important considerations for aggressive equity investors. As a result, most financial advice recommends a portfolio that includes both equity and fixed-income (bond) components.
## 100% Equities Strategy Types
In the 100% equity strategy category, an investor will find a wide range of sub-classes to choose from, including those that focus on one (or a combination of) labels like capital appreciation, aggressive growth, growth, value, and income. Outlined below are some of the characteristics investors can expect from some of the most prominent 100% equity strategies.
### Growth
Growth investing is a style used by many aggressive equity investors who are comfortable with higher-risk investments and seek to take advantage of growing companies. The [Russell 3000 Growth Index](https://www.investopedia.com/terms/r/russell3000-growth.asp) is a broad market index that helps to represent the growth category.
Growth companies offer emerging technologies, new innovations, or a significant sector advantage that gives them above average expectations for revenue and earnings growth.
### Value
Value stocks are often known as long term core holdings for an investor’s portfolio. These equity funds will rely on fundamental analysis to identify stocks that are undervalued in comparison to their fundamental value.
Investment metrics for value investing often include [price-to-earnings](https://www.investopedia.com/terms/p/price-earningsratio.asp), [price-to-book](https://www.investopedia.com/terms/p/price-to-bookratio.asp), and [free cash flow](https://www.investopedia.com/terms/f/freecashflow.asp).
### Income
Income investing is also a top category for core long-term holdings in a portfolio. Income funds will invest in equities with a focus on current income. Income from equity investments is primarily focused on mature companies paying steady [dividend](https://www.investopedia.com/terms/d/dividend.asp) rates.
In the income category, [real estate investment trusts](https://www.investopedia.com/terms/r/reit.asp) and [master limited partnerships](https://www.investopedia.com/terms/m/mlp.asp) are two publicly traded stock categories with unique incorporation structures that require them to pay high levels of income to equity investors.
### Market Capitalization
[Capitalization](https://www.investopedia.com/terms/c/capitalization.asp) is a popular investing strategy for all equity portfolios. Generally, capitalization is broken down by large cap, mid cap, and small cap.
[Large-cap](https://www.investopedia.com/terms/l/large-cap.asp) companies can offer the lowest volatility as they have established businesses and steady earnings that pay dividends. [Small-cap](https://www.investopedia.com/terms/s/small-cap.asp) companies, on the other hand, are usually considered to have the highest risk since they are typically in the early stages of their development.
> **Article Sources**
>
> 1. U.S. Securities and Exchange Commission. "[Publicly Traded REITs](https://www.sec.gov/oiea/investor-alerts-bulletins/ib_reits.html)." Accessed Aug. 31, 2021.
>
> 2. U.S. Securities and Exchange Commission. "[Master Limited Partnerships—An Introduction](https://www.sec.gov/oiea/investor-alerts-bulletins/ib_mlpintro.html)." Accessed Aug. 31, 2021.
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1040 U.S. Individual Tax Return Form
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# Form 1040: U.S. Individual Tax Return Definition, Types, and Use
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*— Investopedia / Mira Norian*
## What Is Form 1040: U.S. Individual Tax Return?
Individual taxpayers use Form 1040, a standard [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) form, to file their annual income tax returns. Form 1040 is divided into sections that let you report your taxable income for the year, as well as your deductions, in order to calculate how much you owe in taxes or receive as a refund.
### Key Takeaways
* Form 1040 is what individual taxpayers use to file their taxes with the IRS.
* The form determines if additional taxes are due or if the filer will receive a tax refund.
* Taxpayers must include personal information on Form 1040, such as name, address, Social Security number, and the number of dependents.
* A filer also needs to report wages, salary, taxable interest, capital gains, pensions, Social Security benefits, and other types of income.
* Taxpayers may need to file supplemental tax 1040 forms depending on their situation.
## Who Can File Form 1040: U.S. Individual Tax Return?
Form 1040 needs to be filed with the IRS by April 15 in most years. Everyone who earns income over a certain threshold must file an [income tax](https://www.investopedia.com/income-tax-4427722) return with the IRS. Keep in mind that businesses have different forms to report their profits.
If a United States citizen wants or needs to file a federal income tax return, they need to file Form 1040 or a variation of Form 1040 (see "Types of Form 1040," below). Who must file is dependent upon three general conditions.
First, the IRS requires individuals with certain levels of [gross income](https://www.investopedia.com/terms/g/grossincome.asp) to file taxes. This threshold varies based on the individual's filing status and age. The table below lists the income limits for individuals under 65 years old. Keep in mind that older taxpayers tend to have higher thresholds, and the threshold changes if neither, one, or both individuals in a marriage are 65 or older.
Second, children and dependents may not be required to file if they can be claimed as a dependent. In 2024, if the dependent's unearned income is greater than $1,300 ($1,350 in 2025) but under $13,000 ($13,500 in 2025); their earned income is greater than $14,600 ($15,000 in 2025); or gross income meets certain thresholds, the dependent must file their own Form 1040. These rules are slightly different for single dependents as opposed to dependents who are married.
Third, some specific situations require an individual to file Form 1040. Regardless of their income or dependency status, some of those situations include but are not limited to:
* You owe additional special taxes such as alternative minimum tax
* You receive [health savings account (HSA)](https://www.investopedia.com/terms/h/hsa.asp) or other health account distributions
* You had net earnings from self-employment of at least $400
* You met the income threshold limits for [wages earned from a church](https://www.investopedia.com/terms/p/parsonageallowance.asp)
## How to File Form 1040: U.S. Individual Tax Return
Form 1040 is available on the IRS website and has two pages that must be filled out. Form 1040 can be mailed in or e-filed. Tax filers are asked for their [filing status](https://www.investopedia.com/terms/f/filingstatus.asp) along with their personal information, such as their name, address, Social Security number (some information on one's spouse may also be needed), and the number of their dependents.
The form also asks whether the taxpayer wishes to contribute $3 to presidential campaign funds.
The 1040 income section asks the filer to report wages, salary, taxable interest, capital gains, pensions, Social Security benefits, and other types of income. Tax legislation enacted at the end of 2017 [eliminated many deductions](https://www.investopedia.com/tax-deductions-that-are-going-away-4582165), including unreimbursed employee expenses, tax-preparation fees, and the cost of moving for a job (except for military on active duty).
The form uses what the IRS terms a building block approach and allows taxpayers to add only the [schedules](https://www.investopedia.com/terms/t/taxschedule.asp) they need to their tax returns. Some individuals may need to file one or more of six supplemental schedules with their 1040 in addition to long-standing schedules for items like [business income](https://www.investopedia.com/terms/b/businessincome.asp) or loss.
This depends on whether they're claiming tax credits or owe additional taxes. Many individual taxpayers, however, only need to file a 1040 and no schedules_._
:max_bytes(150000):strip_icc()/Screenshot2025-03-04at3.41.53PM-9f885b6d90f64ee5a39060268c0d9fa6.png)
*— IRS*
[IRS Form 1040](https://www.irs.gov/pub/irs-pdf/f1040.pdf)
## Types of Form 1040
Taxpayers in certain situations may need to file a different variant of the 1040 form instead of the standard version. Below are the options.
### Form 1040-NR
Certain [nonresident aliens](https://www.investopedia.com/terms/n/nonresidentalien.asp) or their representatives need to file this form, including:
* Those who are engaged in trade or business in the United States
* Representatives of a deceased person who would have had to file a Form 1040-NR
* Those who represent an [estate or trust](https://www.investopedia.com/tax-form-1041-estates-and-trusts-5211109) that had to file a 1040-NR
The IRS also produces the 1040-SS and 1040-PR. The 1040-SS is for residents of American Samoa, the CNMI, Guam, Puerto Rico, or the U.S. Virgin Islands who have net [self-employment](https://www.investopedia.com/terms/s/self-employed.asp) income and do not have to file Form 1040 with the U.S. Form 1040-PR is the Spanish-language equivalent of Form 1040-SS.
### Form 1040-ES
This form is used to determine and pay estimated quarterly taxes. The estimated tax applies to income that isn’t subject to withholding, which includes earnings from self-employment, interest, dividends, and rents. This may also include [unemployment](https://www.investopedia.com/terms/u/unemployment.asp) compensation, pension income, and the taxable portion of Social Security benefits.
### Form 1040-V
This is a statement accompanying a taxpayer's payment for any balance on the "Amount you owe" line of the 1040 or 1040-NR.
### Form 1040-X
If a filer makes a mistake or forgets to include information on any 1040 form, [Form 1040-X](https://www.investopedia.com/terms/f/form1040x.asp) is used for making changes to previously filed 1040s.
### Form 1040-SR
The IRS introduced a new 1040 form in 2019, [Form 1040-SR](https://www.investopedia.com/taxes/seniors-get-new-simplified-tax-form/), which is designed for taxpayers over the age of 65. Changes include a larger font, no shading (shaded sections can be hard to read), and a standard deduction chart that includes the extra standard deduction for taxpayers over 65. Taxpayers in this age bracket who fill out their taxes online won't see a difference, but those who do it on paper will.
## Standard Deductions on Form 1040
The 1040 income section asks taxpayers for their filing status. This determines the taxpayer's [standard deduction](https://www.investopedia.com/terms/s/standarddeduction.asp). The table below highlights the deductions for the 2024 and 2025 tax years. Keep in mind that you file 2024 taxes in 2025 and 2025 taxes in 2026.
An additional deduction may be taken by those [who are age 65 or older or blind](https://www.investopedia.com/terms/b/blind-taxpayer.asp). Just like the standard deduction, these figures are adjusted annually for inflation.
* Aged or blind: $1,550 in 2024 increased to $1,950 if the individual is also unmarried and not a surviving spouse. These amounts increase to $1,600 and $2,000, respectively, in 2025.
> **Important**
>
> The standard deduction cannot be taken by an estate or trust, an individual who is filing a short return due to a change in accounting periods, an individual who was a nonresident alien part of the tax year, or a married individual whose spouse is filing separately and itemizing.
## Additional Schedules
As noted above, Form 1040 uses a variety of additional schedules to help taxpayers report their tax obligations. The following schedules are used to compile financial information away from Form 1040 to later use with Form 1040 as the primary source of reporting.
### Schedule 1
Schedule 1 is used to report additional income or adjustments to income. This may include [alimony](https://www.investopedia.com/terms/a/alimony.asp), disposition proceeds from the sale of a business, educator expenses, health savings account (HSA) contributions, or unemployment compensation.
It's important to note that:
* Other Income from Schedule 1: This is reported on Line 8 of Form 1040
* Adjustments to Income from Schedule 1: This is reported on Line 10 of Form 1040
### Schedule 2
Schedule 2 is used to report additional taxes. One part of Schedule 2 reports alternative minimum tax and repayment of excess premium tax credits for insurance bought through [health insurance marketplaces](https://www.investopedia.com/terms/h/health-insurance-marketplace.asp).
Another part of Schedule 2 is used to report self-employment taxes, Medicare taxes, taxes on [individual retirement accounts (IRAs)](https://www.investopedia.com/terms/i/ira.asp), household employment taxes, and other taxes. These two parts from Schedule 2 are reported on Line 17 and Line 23 on Form 1040.
### Schedule 3
Schedule 3 is used to report additional tax credits and payments. These credits include dependent care expense credits, [residential energy credits](https://www.investopedia.com/terms/e/energy-tax-credit.asp), excess Social Security taxes previously remitted, and excess federal income taxes previously remitted.
Nonrefundable credits from Schedule 3 are reported on Line 20 of Form 1040, while refundable credits from Schedule 3 are reported on Line 31 of Form 1040.
### Schedule A (Itemized Deductions)
Schedule A is used to figure out a taxpayer's [itemized deduction](https://www.investopedia.com/terms/i/itemizeddeduction.asp). A taxpayer's federal income liability is most often minimized when choosing the larger of their standard deduction or itemized deduction.
The itemized deduction calculation includes medical expenses, dental expenses, certain taxes, certain interest assessments, theft losses, and other expenses. Any input from Schedule A is entered into Line 12a on Form 1040.
### Schedule B (Interest and Ordinary Dividends)
Schedule B is used for taxpayers who received greater than $1,500 of taxable interest or ordinary dividends. It is also used to report interest from a [seller-financed mortgage](https://www.investopedia.com/terms/s/seller-financing.asp), accrued interest from a bond, interest or ordinary dividends as a nominee, and other similar types of interest. Input from Schedule B is entered into Line 2b and Line 3b on Form 1040.
### Schedule C (Net Profit From Business)
Schedule C is used to report business income or loss. An activity qualifies as a business if the taxpayer is engaged in the activity for the primary purpose of producing income or profit. The activity is also considered a business as long as the taxpayer is involved in the activity with regularity and continuity. Profit from Schedule C is entered on Schedule 1, Line 3. It is also used on Schedule SE.
> **Tip**
>
> If your business was a sole proprietorship or qualified joint venture and you meet other criteria, you can report your business operations using Schedule C.
### Schedule D (Capital Gains and Losses)
Schedule D is used to report taxable income from the sale or exchange of a capital asset. This gain may have arisen from an exchange or an [involuntary conversion](https://www.investopedia.com/terms/i/involuntary-conversion.asp). Schedule D is also used to report capital gain distributions not otherwise reported on Form 1040 as well as nonbusiness bad debts. Input from Schedule D is entered on Form 1040, Line 7.
### Schedule E (Supplemental Income and Loss)
Schedule E is used to report various types of additional income or losses. This supplemental financial activity includes real estate rental income, [royalties](https://www.investopedia.com/terms/r/royalty.asp), partnerships, estates, trusts, and residual interests in real estate mortgage investment conduits. Supplemental income figures from Schedule E are reported on Form 1040 in the "Income" section.
### Schedule EIC (Earned Income Credit)
Schedule EIC is quite different from other tax schedules. The earned income credit is calculated separately from this schedule. However, Schedule EIC is used to substantiate the qualification of your qualifying children by remitting to the IRS your child's name, [Social Security number](https://www.investopedia.com/terms/s/ssn.asp), birth year, relationship to you, and residency status. Information from Schedule EIC is not directly input into Form 1040.
> **Warning**
>
> The Earned Income Credit is maximized if a taxpayer has at least three children. Therefore, Schedule EIC only asks for information on three children; additional forms for children numbering more than three are not required.
### Other Schedules
Other notable supplementary schedules to Form 1040 include:
* Schedule F is used to report profits or losses from farming operations.
* Schedule H is used to report [household employment](https://www.investopedia.com/terms/h/household-employee.asp) taxes if you paid cash wages to household employees and those wages were subject to various federal taxes.
* Schedule J is used to report farming or fishing trade income by averaging taxable income over the previous three years.
* Schedule R is used to report a credit for the elderly or disabled.
* Schedule SE is used to report the tax due on net earnings from self-employment.
* Schedule 8812 is used to report potentially refundable credits for qualifying children (or other dependents).
## What Is Form 1040 Used for?
Form 1040 is the primary tax form used by U.S. taxpayers to file their annual income tax returns. Taxpayers input their personal information and tax information onto the form, then submit the form to the IRS for review.
## Is Form 1040 the Same As a W-2?
Form 1040 is different from a W-2. A W-2 is a wage and tax statement that an employee receives from a company they worked for during the tax year. The information listed on the W-2 is used to fill out Form 1040.
## Where Can I Find Form 1040?
Form 1040 is not a tax statement or form that gets distributed to taxpayers. Unlike a W-2 or 1099 statement that is mailed by an employer or party you've contracted with, Form 1040 is available for download on the IRS website. Free IRS filing platforms such as Free File Fillable Forms will provide digital copies. Some public courthouses or federal buildings in your community may offer paper copies available for pickup.
## What Is the Difference Between a 1040 and a 1099?
Form 1040 and Form 1099 are different components of an individual's [tax return](https://www.investopedia.com/terms/t/taxreturn.asp). There are many different types of Form 1099, but this form is most commonly given to independent contractors to remit tax information relating to payments they received during the tax year. This information is used to complete Form 1040, as the financial records listed on Form 1099 are input into Form 1040.
## The Bottom Line
Form 1040 is the central part of tax filing for United States citizens. It is the tax form that all taxpayer financial statements eventually feed into and support tax schedules branch out of. Regardless of an individual's filing status or income, taxpayers who file taxes will complete some version of Form 1040.
> **Article Sources**
>
> 1. Internal Revenue Service. "[1040 (and 1040-SR) Instructions](https://www.irs.gov/pub/irs-pdf/i1040gi.pdf)," Pages 6, 8-9.
>
> 2. Internal Revenue Service. "[Topic No. 407, Business Income](https://www.irs.gov/taxtopics/tc407)."
>
> 3. Internal Revenue Service. "[Here's Who Needs to File a Tax Return in 2024](https://www.irs.gov/newsroom/heres-who-needs-to-file-a-tax-return-in-2024)."
>
> 4. Internal Revenue Service. "[Check If You Need to File a Tax Retur](https://www.irs.gov/individuals/check-if-you-need-to-file-a-tax-return)n."
>
> 5. Internal Revenue Service. "[Publication 501, Dependents, Standard Deduction, and Filing Information](https://www.irs.gov/publications/p501)."
>
> 6. Internal Revenue Service. "[Rev. Proc. 2024-40](https://www.irs.gov/pub/irs-drop/rp-24-40.pdf)," Pages 7, 12.
>
> 7. Internal Revenue Service. "[Rev. Proc. 2023-34](https://www.irs.gov/pub/irs-drop/rp-23-34.pdf)," Pages 7, 12.
>
> 8. Internal Revenue Service. "[Dependents](https://apps.irs.gov/app/vita/content/globalmedia/4491_dependency_exemptions.pdf)."
>
> 9. Internal Revenue Service. "[1040 (and 1040-SR) Instructions](https://www.irs.gov/pub/irs-pdf/i1040gi.pdf)," Page 11.
>
> 10. Internal Revenue Service. "[Form 1040](https://www.irs.gov/pub/irs-pdf/f1040.pdf)."
>
> 11. Internal Revenue Service. "[Moving Expenses to and From the United States](https://www.irs.gov/individuals/international-taxpayers/moving-expenses-to-and-from-the-united-states)."
>
> 12. Internal Revenue Service. "[Tax Reform Affects if and How Taxpayers Itemize Their Deductions](https://www.irs.gov/newsroom/tax-reform-affects-if-and-how-taxpayers-itemize-their-deductions)."
>
> 13. National Archives, Federal Register. "[Agency Information Collection Activities; Submission for OMB Review; Comment Request; U.S. Individual Income Tax Return](https://www.federalregister.gov/documents/2018/10/11/2018-22180/agency-information-collection-activities-submission-for-omb-review-comment-request-us-individual)."
>
> 14. Internal Revenue Service. "[About Form 1040-NR, U.S. Nonresident Alien Income Tax Return](https://www.irs.gov/forms-pubs/about-form-1040-nr)."
>
> 15. Internal Revenue Service. "[Individuals Living or Working in a U.S. Territory](https://www.irs.gov/individuals/international-taxpayers/individuals-living-or-working-in-us-possessions)."
>
> 16. Internal Revenue Service. "[About Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico)](https://www.irs.gov/forms-pubs/about-form-1040-ss)."
>
> 17. Internal Revenue Service. "[About Form 1040-ES, Estimated Tax for Individuals](https://www.irs.gov/forms-pubs/about-form-1040-es)."
>
> 18. Internal Revenue Service. "[Form 1040-V](https://www.irs.gov/pub/irs-pdf/f1040v.pdf)."
>
> 19. Internal Revenue Service. "[Instructions for Form 1040-X](https://www.irs.gov/instructions/i1040x)."
>
> 20. Internal Revenue Service. "[About Form 1040-SR, U.S. Tax Return for Seniors](https://www.irs.gov/forms-pubs/about-form-1040-sr)."
>
> 21. Internal Revenue Service. "[IRS Releases Tax Inflation Adjustments for Tax Year 2025](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025)."
>
> 22. Internal Revenue Service. "[IRS Provides Tax Inflation Adjustments for Tax Year 2024](https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024)."
>
> 23. Internal Revenue Service. "[Rev. Proc. 2024-40](https://www.irs.gov/pub/irs-drop/rp-24-40.pdf)," Page 12.
>
> 24. Internal Revenue Service. "[Rev. Proc. 2023-34](https://www.irs.gov/pub/irs-drop/rp-23-34.pdf)," Page 12.
>
> 25. Internal Revenue Service. "[Topic No. 551, Standard Deduction](https://www.irs.gov/taxtopics/tc551)."
>
> 26. Internal Revenue Service. "[Schedule 1 (Form 1040)](https://www.irs.gov/pub/irs-pdf/f1040s1.pdf)."
>
> 27. Internal Revenue Service. "[Schedule 2 (Form 1040)](https://www.irs.gov/pub/irs-pdf/f1040s2.pdf)."
>
> 28. Internal Revenue Service. "[Schedule 3 (Form 1040)](https://www.irs.gov/pub/irs-pdf/f1040s3.pdf)."
>
> 29. Internal Revenue Service. "[2024 Instructions for Schedule A](https://www.irs.gov/instructions/i1040sca#idm139916261908048)."
>
> 30. Internal Revenue Service. "[About Schedule B (Form 1040), Interest and Ordinary Dividends](https://www.irs.gov/forms-pubs/about-schedule-b-form-1040)."
>
> 31. Internal Revenue Service. "[About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship)](https://www.irs.gov/forms-pubs/about-schedule-c-form-1040)."
>
> 32. Internal Revenue Service. "[About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship)](https://www.irs.gov/forms-pubs/about-schedule-c-form-1040)."
>
> 33. Internal Revenue Service. "[About Schedule D (Form 1040), Capital Gains and Losses](https://www.irs.gov/forms-pubs/about-schedule-d-form-1040)."
>
> 34. Internal Revenue Service. "[About Schedule E (Form 1040), Supplemental Income and Loss](https://www.irs.gov/forms-pubs/about-schedule-e-form-1040)."
>
> 35. Internal Revenue Services. "[Publication 596, Earned Income Credit (EIC)](https://www.irs.gov/publications/p596)."
>
> 36. Internal Revenue Service. "[About Schedule EIC (Form 1040 or 1040-SR), Earned Income Credit](https://www.irs.gov/forms-pubs/about-schedule-eic-form-1040)."
>
> 37. Internal Revenue Service. "[Earned Income Credit Qualifying Child Information](https://www.irs.gov/pub/irs-pdf/f1040sei.pdf)."
>
> 38. Internal Revenue Service. "[About Schedule F (Form 1040), Profit or Loss From Farming](https://www.irs.gov/forms-pubs/about-schedule-f-form-1040)."
>
> 39. Internal Revenue Service. "[About Schedule H (Form 1040), Household Employment Taxes](https://www.irs.gov/forms-pubs/about-schedule-h-form-1040)."
>
> 40. Internal Revenue Service. "[About Schedule J (Form 1040), Income Averaging for Farmers and Fisherman](https://www.irs.gov/forms-pubs/about-schedule-j-form-1040)."
>
> 41. Internal Revenue Service. "[About Schedule R (Form 1040), Credit for the Elderly or the Disabled](https://www.irs.gov/forms-pubs/about-schedule-r-form-1040)."
>
> 42. Internal Revenue Service. "[About Schedule SE (Form 1040), Self-Employment Tax](https://www.irs.gov/forms-pubs/about-schedule-se-form-1040)."
>
> 43. Internal Revenue Service. "[About Schedule 8812 (Form 1040), Credits for Qualifying Children and Other Dependents](https://www.irs.gov/forms-pubs/about-schedule-8812-form-1040)."
|
1040A Form
|
# Form 1040-A: U.S. Individual Tax Return: Overview
## What Was Form 1040-A: U.S. Individual Tax Return?
Form 1040-A of the Internal Revenue Service (IRS) was a simplified version of Form 1040 used by U.S. taxpayers to file an annual income tax return. To have been eligible to use Form 1040-A, an individual needed to meet certain requirements such as not itemizing deductions, not owning a business, and having a taxable income of less than $100,000. Unofficially known as the "short form," Form 1040-A was eliminated for the 2018 tax year in favor of the redesigned Form 1040 that debuted that year.
### Key Takeaways
* Form 1040-A was a simplified version of Form 1040 used for filing individual income tax.
* Filers using 1040-A were required to have less than $100,000 in taxable income and not have exercised any incentive stock options during the year.
* The IRS eliminated Form 1040-A for the 2018 tax year in favor of the redesigned Form 1040.
* Another variant of Form 1040 was Form 1040-EZ, which was even simpler than Form 1040-A and was also eliminated starting with the 2018 tax filing.
## Who Had to File Form 1040-A: U.S. Individual Tax Return?
Most U.S. taxpayers use IRS [Form 1040](https://www.investopedia.com/terms/1/1040.asp) to file their [income tax returns](https://www.investopedia.com/terms/t/taxreturn.asp). Form 1040 is a detailed form that offers taxpayers with complex investments, [itemized deductions](https://www.investopedia.com/terms/i/itemizeddeduction.asp), multiple [tax credits](https://www.investopedia.com/terms/t/taxcredit.asp), and more than $100,000 in annual income more opportunities to lower their tax liability. Because additional paperwork is usually required with Form 1040, individuals with simpler tax situations previously had the option to use Form 1040-A instead.
Form 1040-A was a simplified version of Form 1040. The two-page form allowed taxpayers to report ordinary income, some deductions, and credits. Individuals who fell under any of the five status options—single, head of household, married filing separately, married filing jointly, or widowed—could file their tax returns using the 1040-A. Though Form 1040-A was available to taxpayers of any age and filing status, not everyone qualified to use this form.
Tax filers who used 1040-A must have earned less than $100,000 taxable income and not have exercised any [incentive stock options](https://www.investopedia.com/terms/i/iso.asp) (ISO) during the tax year. The income reported must have been earned as a wage, salary, tip, capital gain, dividend, interest income, unemployment compensation, pension, annuity, taxable Social Security and railroad retirement benefit, taxable scholarship or grant, and [Alaska Permanent Fund](https://www.investopedia.com/terms/a/alaska-permanent-fund.asp) dividend. Any other form of income, such as business income, needed to be reported on the more complex Form 1040.
## How Did Form 1040-A Work?
Form 1040-A also gave taxpayers the opportunity to claim several tax deductions to reduce their [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp). However, the only deductions they could claim included student loan interest, post-secondary tuition and fees, classroom expenses, and individual retirement account (IRA) contributions. Taxpayers using Form 1040-A could not claim itemized deductions. This limitation meant that if an individual qualified for other deductions from sources such as [charitable donations](https://www.investopedia.com/terms/c/charitabledonation.asp) or [mortgage interest](https://www.investopedia.com/terms/home-mortgage-interest.asp), and the total itemized deductible amount was more than the standard deductions, it would not have been advantageous for them to use 1040-A.
Form 1040-A also could be used to claim tax credits. Tax credits reduce the bottom line or total tax bill of a taxpayer. The credits that could be claimed using this form were the [American Opportunity Tax Credit](https://www.investopedia.com/terms/a/american-opportunity-tax-credit.asp) (AOTC), [Earned Income Credit](https://www.investopedia.com/terms/e/earnedincomecredit.asp) (EITC), child tax and [additional child tax credit](https://www.investopedia.com/terms/a/additional-child-tax-credit.asp), [child and dependent care credit](https://www.investopedia.com/terms/c/childanddependentcarecredit.asp), credits for the elderly or disabled, and [retirement savings contribution credit](https://www.investopedia.com/terms/c/credit-for-qualified-retirement-savings-contribution.asp).
## Form 1040-A vs. Form 1040-EZ
Another variant of Form 1040 was [Form 1040-EZ](https://www.investopedia.com/terms/1/1040ez.asp), which was even simpler and easier to fill out than Form 1040-A and was also eliminated starting with the 2018 tax filing. But with Form 1040-EZ, the individual had to file as either a single taxpayer or as married filing jointly; they could not claim deductions and could only claim the EIC.
Although Form 1040-A was slightly more complex than Form 1040-EZ, it was still relatively simple compared to 1040. Once their financial situation became complicated with dependents, special deductions, and credits—such as those associated with post-secondary education tuition—most taxpayers needed to switch from filing with the 1040-EZ to the 1040-A.
The redesigned Form 1040 that debuted with the 2018 tax year is designed to be much simpler to use than its predecessor. For this reason, the IRS eliminated both Form 1040-A and Form 1040-EZ.
> **Article Sources**
>
> 1. Internal Revenue Service. "[1040-A Instructions (2017)](https://www.irs.gov/pub/irs-prior/i1040a--2017.pdf)," Pages 13 & 14. Accessed Feb. 9, 2021.
>
> 2. Internal Revenue Service. "[About Form 1040: U.S. Individual Income Tax Return](https://www.irs.gov/forms-pubs/about-form-1040)." Accessed Dec. 6, 2019.
>
> 3. Internal Revenue Service. "[Form 1040-A](https://www.irs.gov/pub/irs-prior/f1040a--2017.pdf)." Pages 1 & 2. Accessed Dec. 7, 2019.
>
> 4. Internal Revenue Service. "[Instructions for Form 1040EZ (2017)](https://www.irs.gov/pub/irs-prior/i1040ez--2017.pdf)," Page 6. Accessed Dec. 6, 2019.
>
> 5. Internal Revenue Service. "[Questions and Answers about the 2018 Form 1040](https://www.irs.gov/forms-pubs/questions-and-answers-about-the-2018-form-1040)." Accessed Dec. 6, 2019.
|
1040EZ Form
|
# What Was Form 1040EZ, and Why Is It No Longer Used?
:max_bytes(150000):strip_icc()/tax-time-182487017-c9ec848855c44554a064bedb50e7f318-9b5ece6fb52c403395224e8193978c0e.jpg)
*— Kameleon007 / Getty Images*
> **Definition**
>
> Form 1040EZ, which is no longer used, was the shortest and most straightforward version of Form 1040.
## What Was Form 1040EZ: Income Tax Return for Single and Joint Filers with No Dependents?
IRS Form 1040EZ: Income Tax Return for Single and Joint Filers with No Dependents was the shortened version of the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) Form 1040. This form was for taxpayers with basic tax situations and offered a fast and easy way to file income taxes.
The form was discontinued as of the 2018 tax year in favor of the redesigned [Form 1040](https://www.investopedia.com/terms/1/1040.asp).
### Key Takeaways
* Form 1040EZ was a shortened version of Form 1040 for taxpayers with basic tax situations.
* The form was discontinued as of the 2018 tax year and replaced with the redesigned Form 1040.
* Form 1040EZ could only be used by people with no dependents who were younger than age 65 and earned less than $100,000 per year.
* 1040EZ was about one-fifth as long as the full 1040 form, with fewer deductions and tax credits.
## Eligibility for Form 1040EZ
To use the form, a taxpayer had to have taxable income of less than $100,000, less than $1,500 of interest income, and claim no dependents. Other requirements for filing the Form 1040EZ included:c
* The taxpayer and their spouse, if married filing jointly, had to be under age 65 at the end of the relevant filing period.
* They could not be [blind as of the end of the relevant filing period](https://www.investopedia.com/terms/b/blind-taxpayer.asp).
* The filer could take no deductions for student loan interest, educator expenses, tuition and fees, or itemized deductions.
* If the filer received interest income, they could not have been required to file Schedule B, didn’t have amounts in boxes 11, 12, or 13 of Form 1099-INT or boxes 6 and 10 of Form 1099-OID, and didn’t earn any interest as a nominee.
* Tax credits for retirement savings, health coverage, and education were not allowed.
* The tax filer could not have received any advance [earned income](https://www.investopedia.com/terms/e/earnedincome.asp) credit (EIC) although they would have been allowed to claim the EIC when filing Form 1040EZ.
* The filer could not be a debtor in any Chapter 11 [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp) case that was filed after October 16, 2005.
* The filer (and their spouse, if married filing jointly), didn’t receive any advance payments of the premium tax credit offered for health coverage plans sold on the Marketplace.
* The filer didn’t owe any household employee taxes on wages paid to household employees.
## Limitations of Form 1040EZ
Form 1040EZ was ultimately scrapped due to the limitations of the form. The IRS opted for the building block approach of allowing taxpayers to more easily add allowances or credits as applicable to their return. In addition, Form 1040EZ had several other drawbacks.
First, the form could only be used by those who earned less than a certain amount of income. The types of eligible income was also limited. Anyone who had income from sources other than wages, salaries, tips, taxable scholarships, or fellowship grants could not use Form 1040EZ. This precluded any taxpayer who received foreign income (or filed using a foreign address) from using the form. In addition, any taxpayer hoping to claim a dependent could also not use Form 1040EZ.
With Form 1040EZ, taxpayers were not allowed to itemize their deductions nor were they able to take other types of deductions, such as the student loan interest deduction or deductions for [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp) contributions.
## Form 1040EZ vs. Form 1040
Form 1040EZ had only a few credits or [deductions](https://www.investopedia.com/terms/t/tax-deduction.asp) available to taxpayers. Filers were able to include an [earned income credit](https://www.investopedia.com/terms/e/earnedincomecredit.asp) and elect nontaxable combat pay.
For most tax years, Form 1040 had 80% more lines than form 1040EZ. One significant difference was that Form 1040 had fields to include information about dependents, while 1040EZ did not allow individuals to claim [dependents](https://www.investopedia.com/terms/d/dependent.asp). Similar to the standard form, the EZ version had sections to record wages, salaries and tips, and taxable interest under $1,500. The filer was also able to include unemployment compensation payments.
### 1982
The first year that Form 1040EZ was introduced.
Form 1040EZ allowed filers to claim income from wages, tips, salaries, taxable grants or scholarships, the Alaska Permanent Fund, and unemployment compensation.
Form 1040, in contrast, had at least 16 income categories. Categories available on the standard form included [dividend](https://www.investopedia.com/terms/d/dividend.asp) payments, retirement account distributions, and farm and rental income. Form 1040 also allowed the entry of [Social Security benefits](https://www.investopedia.com/terms/s/social-security-benefits.asp), alimony, and other forms of income. This form also had a long list of deductions, ranging from education costs to healthcare savings plan contributions.
## Transition Away From Form 1040EZ
In 2018, the IRS replaced Forms 1040A and 1040EZ with a redesigned Form 1040. This new Form 1040 included six new numbered schedules in addition to the existing ones like Schedule A. Many people may only need to file the simplified Form 1040. Others can file Form 1040 with additional forms for their specific needs.
## Is the 1040EZ Tax Form Still in Use?
The 1040EZ tax form was eliminated in 2018 and was replaced with the redesigned Form 1040.
## Is There a Form 1040EZ for 2024 or 2025?
No. The IRS no longer publishes Form 1040EZ.
## What Was the 1040EZ Tax Form Used for?
Form 1040EZ was used by taxpayers with no dependents who were under age 65 and earned less than $100,000 per year. This form had fewer tax credits and deductions than the full-length 1040 form.
## What Is the Difference Between IRS Forms 1040, 1040A and 1040EZ?
[Form 1040A](https://www.investopedia.com/terms/1/1040a.asp) was a simplified tax form for taxpayers with an income below $100,000 who did not exercise any incentive stock options throughout the year. All three forms were eliminated in the 2018 tax year, and replaced with a redesigned Form 1040.
## The Bottom Line
The IRS previously allowed for taxpayers to select a specific Form 1040 to use based on the complexity of their tax return. The simplest form was Form 1040EZ. However, the form was discontinued in 2018. Since then, all taxpayers must use Form 1040 (or Form 1040-SR, for those age 65 or older) as part of their annual filing.
> **Article Sources**
>
> 1. Internal Revenue Service. "[All Taxpayers Will File Using 2018 Form 1040; Forms 1040-A and 1040-EZ No Longer Available](https://www.irs.gov/newsroom/all-taxpayers-will-file-using-2018-form-1040-forms-1040a-and-1040ez-no-longer-available)."
>
> 2. Internal Revenue Service. "[2017 Instruction 1040EZ](https://www.irs.gov/pub/irs-prior/i1040ez--2017.pdf)."
>
> 3. Internal Revenue Service. "[2017 Form 1040](https://www.irs.gov/pub/irs-prior/f1040--2017.pdf)."
>
> 4. Internal Revenue Service. "[2017 Form 1040EZ](https://www.irs.gov/pub/irs-prior/f1040ez--2017.pdf)."
>
> 5. Internal Revenue Service. "[1982 Instructions for Preparing Forms 1040EZ and 1040A](https://www.irs.gov/pub/irs-prior/i1040eza--1982.pdf)."
>
> 6. Internal Revenue Service. "[Here Are Five Facts About the New Form 1040](https://www.irs.gov/newsroom/here-are-five-facts-about-the-new-form-1040)."
>
> 7. Internal Revenue Service. "[2017 Instruction 1040A](https://www.irs.gov/pub/irs-prior/i1040a--2017.pdf)."
|
SEC Release IA-1092
|
# SEC Release IA-1092: What it is, History
> **Definition**
>
> SEC Release IA-1092 is a memo from the SEC that clarifies state and federal laws for investment advisers and financial planners, building on the Investment Advisers Act of 1940.
## What Is SEC Release IA-1092?
SEC Release IA-1092 is a release from the [Securities & Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) that provides uniform interpretations of how state and federal adviser laws apply to those that provide financial services.
SEC Release IA-1092 builds on the [Investment Advisers Act of 1940](https://www.investopedia.com/terms/i/investadvact.asp) or the Advisers Act that Congress enacted to protect persons who rely on investment advisers for advice on purchasing and selling securities.
### Key Takeaways
* SEC Release IA-1092 clarifies how state and federal securities laws apply to investment advisers and financial planners.
* This memo, which was issued in 1987, expands on the Investment Advisers Act of 1940.
* IA-1092 defines the roles and duties of investment advisers and pension consultants, in particular.
## Understanding SEC Release IA-1092
SEC Release IA-1092 is the result of a 1987 collaboration between the Securities & Exchange Commission (SEC) on the federal side and the [North American Securities Administrators Association](https://www.investopedia.com/terms/n/nasaa.asp) (NASAA) on the state side.
These organizations issued IA-1092 in 1987 as a memo in response to the proliferation of financial planning and investment advice professionals in the 1980s. The act reaffirmed the definition of an [investment adviser](https://www.investopedia.com/terms/i/investmentadvisor.asp) (IA) as described in SEC Release IA-770 and added some refinements:
* First, pension consultants and advisers to athletes and entertainers were included as providers of investment advice.
* Second, in some cases, firms that recommend investment advisers also had to register themselves.
* Even if an IA did not render investment advice as their principal business activity, simply doing so with some regularity in many cases was enough to require registration.
* If a registered representative of a broker-dealer set up a separate business entity to provide financial planning or investment advice for a fee, they were not allowed to rely on the [broker-dealer](https://www.investopedia.com/terms/b/broker-dealer.asp) (BD) exemption from registration. (This became known as a statutory investment adviser.)
* Compensation did not have to be monetary to fall under the definition. Simply the receipt of products, services, or even discounts was also considered compensation.
With regard to sports or entertainment agents, those individuals that negotiated contracts but did not render investment advice were excluded from the definition of an investment adviser.
## SEC Release IA-1092 and the Investment Advisers Act of 1940
The Investment Advisers Act of 1940 defines an investment adviser as any person who, either directly or indirectly through writings, engages in the business of advising others on the value or profitability of securities and receives compensation for this.
Guidelines for the Investment Advisers Act of 1940 can be found in Title 15 section 80b-1 of the United States Code, which notes that investment advisers are of national concern, due to:
* Their advice, counsel, publications, writings, analyses, and reports being in line with interstate commerce.
* Their work customarily relating to the purchase and sale of securities that trade on national securities exchanges and in interstate [over-the-counter](https://www.investopedia.com/terms/o/otc.asp) (OTC) markets.
* Their connection with securities issued by companies engaged in interstate commerce.
* The volume of transactions often materially affecting interstate commerce, national securities exchanges, other securities markets, the national banking system, and even the economy as a whole.
> **Article Sources**
>
> 1. U.S. Securities and Exchange Commission. "[Interpretive Release: Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services](https://www.sec.gov/rules/interp/1987/ia-1092.pdf)." Accessed Aug. 13, 2021.
>
> 2. U.S. Government. "[U.S.C. Title 15, Section 80b-1: Findings](https://www.govinfo.gov/content/pkg/USCODE-2010-title15/pdf/USCODE-2010-title15-chap2D-subchapII-sec80b-1.pdf)." Accessed Aug. 13, 2021.
|
12B-1 Fee
|
# Understanding 12b-1 Fees: What They Are and How They Impact Mutual Funds
> **Definition**
>
> A 12b-1 fee is an annual charge mutual funds assess against investors to cover the costs of selling shares in the mutual fund to other investors.
## 12B-1 Fee: What It Is and What You Should Know
A 12b-1 fee, named after a section of the Investment Company Act of 1940, is an annual marketing or distribution fee that [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) charge. This fee is part of the expense ratio and can range from 0.25% to 1% of the fund's net assets. Primarily, it compensates intermediaries who sell the fund's shares. Critics argue that while intended to lower costs through economies of scale, it mainly rewards salespersons without enhancing fund performance.
### Key Takeaways
* A 12b-1 fee is an annual marketing or distribution fee included in a mutual fund's expense ratio, often ranging from 0.25% to 0.75% of a fund's net assets.
* Originally intended to help investors by reducing overall fund expenses through increased asset growth, the 12b-1 fee is now primarily used to compensate intermediaries for selling fund shares.
* The 12b-1 fee is divided into two components: the distribution and marketing fee, which is capped at 0.75%, and a service fee that can be up to 0.25%.
* Class C shares are more likely to incur the maximum 1% 12b-1 fee, while Class A shares typically charge a front-end load with a lower or no 12b-1 fee.
* The Securities and Exchange Commission (SEC) began reviewing the application and disclosure of the 12b-1 fees in 2015 to ensure compliance with regulations.
## How 12b-1 Fees Impact Mutual Fund Investors
The 12b-1 fee gets its name from Rule 12b-1, which was adopted by the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) in 1980 under the [Investment Company Act of 1940](https://www.investopedia.com/terms/i/investmentcompanyact.asp). The rule's purpose was to enable a mutual fund to raise funds for marketing purposes while limiting its ability to charge existing investors for the cost of doing so.
One rationale for making it easier to raise funds for marketing was that gaining more investors meant a fund could achieve greater [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp) and reduce transaction costs, thereby benefiting all investors. Critics of the 12b-1 rule argue there is no evidence that 12b-1 helps funds grow or that existing shareholders benefit from any such growth.
Under the rule, mutual funds are forbidden from using fund assets to pay for the marketing of the fund unless they submit a 12b-1 plan approved by the fund's directors, including independent directors, and disclose the fees as a separate line item their prospectuses. The 12b-1 fee for marketing purposes is limited to 0.75% of assets annually, and the fund’s board is obligated to regularly reevaluate the benefits of the plan to the fund shareholders.
Still, 12b-1 fees have come under fire over the years. After all, marketing the fund to new investors does little to enhance a fund's performance, and with total mutual fund assets in the U.S. topping $20 trillion, funds don't need to attract investors nearly as much as when Rule 12b-1 was passed.
## Components of the 12b-1 Fee Explained
The 12b-1 fee can be broken down into two distinct charges: the marketing fee, also known as the distribution fee, and the service fee. Total 12b-1 fees charged by a fund are limited to 1% annually. The marketing piece of the total fee is capped at 0.75%, while the service fee can be up to 0.25%. The 12b-1 fee is included in a fund's [expense ratio](https://www.investopedia.com/terms/e/expenseratio.asp).
The 12b-1 fee covers such expenses as advertising, printing and mailing prospectuses, but the bulk of the money goes to commissions for brokers who sell shares in the fund to other investors.
## What Is the Purpose of a 12B-1 Fee?
The 12b-1 fee was designed to enable mutual funds to gain investors via marketing and broker commissions while limiting the amount of money they could draw from the fund's assets to pay for it. It was created in 1980, following the long bear market of the 1970s, when mutual funds saw massive withdrawals.
## How Can a 12B-1 Fee Impact Long-Term Investment Returns?
Like all fees, the 12b-1 fee can have a significant impact on investment returns. A 12b-1 fee of just 0.75% can cost an investor $35,000 in lost returns on a $100,000 investment that returns 5% annually over 20 years.
## What Is the Maximum Allowable 12B-1 Fee a Mutual Fund Can Charge?
The total 12b-1 fee is capped at 1% of assets annually. That includes a maximum of 0.75% for marketing and up to 0.25% for a services fee.
## The Bottom Line
The 12b-1 fee, an annual marketing or distribution fee on mutual funds, is included in the fund’s expense ratio. Initially implemented to reduce costs through economies of scale, it now primarily compensates intermediaries for selling fund shares.
Critics argue it doesn’t enhance fund performance, and its necessity is questioned as mutual fund assets grow. The fee, limited to 1% annually, consists of a distribution and marketing charge and a service fee.
Investors should be aware of these fees in mutual fund shares, such as Class B and Class C, where they often appear, as they can increase the overall expense ratio and affect the fund's cost-effectiveness. Always review a fund’s prospectus for detailed fee disclosures, as these fees can have significant implications on investment returns.
> **Article Sources**
>
> 1. Securities and Exchange Commission. "[Guidance Update](https://www.sec.gov/investment/im-guidance-2016-01.pdf)."
>
> 2. Investment Company Institute. "[Rule 12b-1 Resource Center](https://www.ici.org/rule12b1fees)."
>
> 3. Securities and Exchange Commission. "[The Cost and Benefits to Fund Shareholders of 12b-1 Plans](https://www.sec.gov/files/rules/proposed/s70904/lwalsh042604.pdf)."
>
> 4. Securities and Exchange Commission. "[Mutual Fund Fees and Expenses](https://www.investor.gov/introduction-investing/investing-basics/glossary/mutual-fund-fees-and-expenses)."
|
11th District Cost of Funds Index (COFI)
|
# 11th District Cost of Funds Index: What It is, How It Works
## What Is the 11th District Cost of Funds Index?
The 11th District Cost of Funds Index (COFI) was a monthly index that reflected the average interest rate paid by savings institutions in Arizona, California, and Nevada on checking and savings accounts. It was one of many indices used by mortgage lenders to adjust the interest rate on [adjustable rate mortgages](https://www.investopedia.com/terms/a/arm.asp) (ARM) and was launched in 1981. With an ARM mortgage, the interest rate on a mortgage moves up and down along with some standard interest rate chosen by the lender, and COFI was one of the most popular indices in the western states.
Published on the last day of each month, the COFI represented the [cost of funds](https://www.investopedia.com/terms/c/costoffunds.asp) for Western savings institutions that were members of [Federal Home Loan Bank](https://www.investopedia.com/terms/f/fhlb.asp) of San Francisco, a self-regulatory agency, and satisfied the Bank's criteria for inclusion in the index. The Federal Home Loan Bank of San Francisco stopped publishing the COFI on Jan. 31, 2022. The Federal Home Loan Mortgage Corporation ([Freddie Mac](https://www.investopedia.com/terms/f/freddiemac.asp)) created a replacement index called the Enterprise 11th District COFI Replacement Index.
## Understanding the 11th District COFI
The 11th District Cost of Funds Index (COFI) was computed using several different factors, with interest paid on savings accounts comprising the largest weighting in the average. As a result, the index tended to have low volatility and follow market interest rate changes somewhat slowly; it was generally regarded as a two-month lagging indicator of market interest rates. The interest rate on a mortgage would not match the COFI, rather the ARM rate that was typically 2% to 3% higher than COFI, depending on the borrower's credit history, the size and terms of the loan, the ability of the borrower to negotiate with the bank, and many other factors.
Because was computed using data from three western states, the COFI was primarily used in the western U.S., while the 1-year Treasury index was the measure of choice in the eastern region.
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125% Loan
|
# 125% Loan: What It is, History, Pros and Cons
## What Is a 125% Loan?
A 125% loan is a type of leveraged loan, typically a [mortgage](https://www.investopedia.com/terms/m/mortgage.asp) used to [refinance](https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/) a home, which allows a homeowner to borrow an amount equal to 125% of their property’s appraised value.
For example, if a home is worth $300,000, then a 125% loan would give the borrower access to $375,000 in funds.
### Key Takeaways
* A 125% loan is a mortgage equal to 1.25 times the value of the property securing the loan.
* Popular in the 1990s, 125%, and similar loans became increasingly risky and unmanageable during the 2007–08 housing bubble.
* Due to the risk involved for the lender, 125% loans carry significantly higher interest rates than traditional mortgages.
* Today, 125% loans are less common but are still available from some lenders.
## How a 125% Loan Works
In financing terminology, a 125% loan has a [loan-to-value (LTV) ratio](https://www.investopedia.com/terms/l/loantovalue.asp) of 125%. The LTV ratio, which compares the size of a loan relative to the appraised value of the property that serves as security, is used by lenders to judge a loan’s default risk. A 125% loan is considered riskier than one with an LTV ratio of less than 100%. In fact, with conventional mortgages, the loan size does not typically exceed 80% of a property’s value.
Therefore, according to the [risk-based pricing method](https://www.investopedia.com/terms/r/risk-based_mortgage_pricing.asp) used by lenders, a loan with an LTV ratio of 125% will carry a higher interest rate than one with a lower LTV ratio—as much as double, in some instances.
## Using a 125% Loan for Refinancing
Homeowners who take out a 125% loan usually do so when refinancing their homes to gain access to more cash than they would have available from their home equity. Their motive might be to use the loan to pay off other debts that carry even higher interest rates, such as credit cards.
But because 125% loans have high interest rates and may also have additional fees, anyone who is considering one should plan to shop around for the best terms they can get.
If your goal is to obtain cash to pay off other debt, and you are unable to qualify for a 125% loan (or you decide that you simply don’t want one), then you might still consider a [home equity loan](https://www.investopedia.com/terms/h/homeequityloan.asp). You won’t get as much cash out of it, but the interest rate is likely to be considerably lower, and you can use it to pay off at least a portion of your high-interest debt. Another option would be to do a [cash-out refinance](https://www.investopedia.com/terms/c/cashout_refinance.asp).
## Advantages and Disadvantages of 125% Loans
The advantage of a 125% loan is that it can allow a homeowner, especially one who has not accumulated too much home equity or whose property has actually declined in value, to obtain more cash than they otherwise could.
The disadvantage—to borrower and lender alike—is the added risk compared with a smaller loan. The borrower will be on the hook for more debt, and the lender will face added risk in case of a default. If the borrower does [default](https://www.investopedia.com/terms/d/default2.asp), the lender can [foreclose](https://www.investopedia.com/terms/f/foreclosure.asp) on the property and sell it, but the lender is very unlikely to get all of its money back.
## History of 125% Loans
The 125% loans first became popular during the 1990s, in some cases geared toward low-risk borrowers with high credit scores who wanted to borrow more than their available home equity. Along with other factors, 125% loans played a role in the 2007–08 housing crisis. The crash of real estate markets around the country, kicked off by the [subprime mortgage meltdown](https://www.investopedia.com/terms/s/subprime-meltdown.asp), left many people “[underwater](https://www.investopedia.com/terms/u/underwater.asp)”—that is, they owed more money on their mortgage than their home was actually worth.
As home values dropped, some homeowners who wanted to refinance found that they no longer had enough equity in their homes to qualify for a new loan. Moreover, they could not recoup their losses even if they managed to sell the home.
The now-expired federal [Home Affordable Refinance Program (HARP)](https://www.investopedia.com/terms/h/home-affordable-refinance-program-harp.asp) was introduced in March 2009 as a way to offer relief. It allowed homeowners whose homes were underwater, but who were otherwise in good standing and current with their mortgages, to apply for refinancing. Through HARP, homeowners who owed up to 125% of the value of their homes could refinance at lower rates to help them pay off their debts and get on sounder financial footing.
Originally, homeowners who owed more than that percentage could not apply. But eventually, even the 125% LTV ceiling was removed, allowing still more homeowners to apply for HARP loans. After being extended several times, HARP ended in December 2018.
## What Does 125% Financing Mean?
Typically, when refinancing a home, a homeowner can take out a 125% loan, meaning that they can borrow an amount equal to 125% of the home's appraised value. This type of financing comes into play when the house is worth less than what is owed on it.
## Can You Get a 90% LTV?
A 90% LTV means a 90% loan-to-value ratio. This is a comparison between your mortgage and the value of your home. So for example, a $300,000 home and a $270,000 mortgage, would have a 90% loan-to-value ratio. To achieve this, you would need a downpayment of 10% of the home's value: $30,000. In the U.S., most homes require a 20% downpayment. In this example, that would result in an LTV of 80%.
## Can I Take Equity Out of My House Without Refinancing?
Yes, you can take equity out of your house without refinancing. Ways to do this include home equity loans, home equity lines of credit, and home equity investments.
## The Bottom Line
A 125% loan is an option for homeowners with properties that are valued at less than their outstanding mortgage, enabling them to refinance up to 125% of the value of their home. The loan was first offered during the housing crisis of 2008 when some homeowners found their properties underwater. Although the HARP program, as it was called, ended after nearly a decade in 2018, 125% loans are still available today.
> **Article Sources**
>
> 1. American Banker. "[A 125% LTV Loan Unlike Yesteryear's](https://www.americanbanker.com/news/a-125-ltv-loan-unlike-yesteryears)."
>
> 2. AwesomeFinTech. "[125% Loan](https://www.awesomefintech.com/term/125_loan/)."
>
> 3. Federal Reserve History. "[Subprime Mortgage Crisis](https://www.federalreservehistory.org/essays/subprime-mortgage-crisis)."
>
> 4. ABC. "[How Will the Federal Home Affordable Refinance Program Help Owners?](https://abcnews.go.com/Business/harp-home-affordable-refinance-program-hype/story?id=15972744)"
>
> 5. Federal Deposit Insurance Corporation (FDIC). "[Relief RefinanceSM/Home Affordable Refinance Program (HARP)](https://www.fdic.gov/resources/bankers/affordable-mortgage-lending-center/guide/part-1-docs/freddie-home-affordable-refinance-program.pdf)."
>
> 6. Federal Housing Finance Agency. “[Refinance Report: First Quarter 2019](https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/Refi_1Q2019.pdf),” Pages 1,4.
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12B-1 Plan
|
# Understanding 12B-1 Plans: Structure, Fees, and Disclosure Explained
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*— Investopedia / Michela Buttignol*
## What Is a 12B-1 Plan?
A 12B-1 plan is a plan structured by mutual fund companies for the distribution of funds through intermediaries. 12B-1 plans provide mapping for the partnerships between distributors and intermediaries who help to ensure the sale of a fund. Sales commission schedules and 12B-1 distribution expenses are the primary components driving a 12B-1 plan.
### Key Takeaways
* A 12B-1 plan is designed by mutual fund companies to manage the distribution of funds through intermediaries, focusing primarily on open-end mutual funds.
* The plan includes sales commissions and 12B-1 expenses, which help map partnerships between distributors and financial intermediaries.
* Sales loads, which are fees paid to brokers, can vary across share classes, including Class A, B, and C shares, and are not part of annual fund operating expenses.
* 12B-1 expenses can be up to 1% of an investment's value yearly, with fees usually ranging from 0.25% to 1%, aiding in compensating distributors and brokers.
* Full disclosure of sales load schedules and 12B-1 expenses is mandatory for mutual fund companies, and any changes must be approved by the fund's board and noted in the fund's prospectus.
## How the 12B-1 Plan Functions
12B-1 plans facilitate the partnerships between distributors and [intermediaries](https://www.investopedia.com/terms/f/financialintermediary.asp) offering mutual fund shares. 12B-1 plans are primarily focused on open-end mutual funds, which have multiple class structures for sales charges and distribution expenses. Mutual fund companies consider two types of 12B-1 charges in their 12B-1 plans, sales commissions, and [12B-1 expenses](https://www.investopedia.com/terms/1/12b-1fees.asp).
## Breakdown of Sales Commissions in 12B-1 Plans
Sales commission schedules are structured to provide compensation to intermediaries for transacting [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp). These partnerships can help to increase demand for funds by being marketed from a full-service broker-dealer who facilitates the transaction for a sales load fee. These fees are paid to the broker and are not associated with annual fund operating expenses.
Sales loads are structured to vary across share classes. Share classes can include front-end, back-end, and level-load sales charges. These sales charges are associated with individual retail share classes which typically include [Class A](https://www.investopedia.com/terms/c/classashares.asp), B, and C shares.
## Understanding 12B-1 Expenses: What Are They?
12B-1 expenses paid from the mutual fund to distributors and intermediaries are also a key part of a 12B-1 plan. To market and distribute open-end mutual fund shares, mutual fund companies work with distributors to get their funds listed with discount brokerages and financial advisor platforms. Distributors help fund companies partner with the full-service brokers that transact their funds at the agreed-upon sales load schedule.
Mutual fund companies will pay 12B-1 fees from a mutual fund to compensate distributors. In some cases, funds may also be structured with a low-level load that is paid to financial advisors annually during the course of an investor's [holding period](https://www.investopedia.com/terms/h/holdingperiod.asp).
Financial industry legislation typically restricts 12B-1 fees to 1% of the current value of the investment on an annual basis, but fees generally fall somewhere between 0.25% and 1%. In most cases, fund companies will have higher 12B-1 fees on share classes paying a lower [sales charge](https://www.investopedia.com/terms/s/salescharge.asp), and lower 12B-1 fees on share classes with higher sales charges. This helps to balance out the compensation paid to intermediary brokers while also providing for payment to distribution partners.
## Disclosure Requirements for 12B-1 Plans
Mutual fund companies are required to provide full disclosure on their sales load schedules and 12B-1 annual fund expenses in the fund’s prospectus. The prospectus is one aspect of documentation required for the mutual fund’s registration and is also the key offering document providing information on the fund for investors. 12B-1 plans and any changes to their expense structuring must be approved by the fund’s board of directors and amended in its prospectus filed with the Securities and Exchange Commission.
> **Article Sources**
>
> 1. U.S. Security And Exchange Commission. "[Mutual Fund Classes](https://www.investor.gov/introduction-investing/investing-basics/glossary/mutual-fund-classes)."
>
> 2. U.S. Securities and Exchange Commission. "[Distribution \[and/or Service\] (12b-1) Fees](https://www.investor.gov/introduction-investing/investing-basics/glossary/distribution-andor-service-12b-1-fees)."
>
> 3. U.S. Securities and Exchange Commission. "[Mutual Fund Fees and Expenses](https://www.investor.gov/introduction-investing/investing-basics/glossary/mutual-fund-fees-and-expenses)."
>
> 4. U.S. Securities and Exchange Commission. "[How to Read a Mutual Fund Prospectus (Part 2 of 3: Fee Table and Performance)](https://www.sec.gov/oiea/investor-alerts-bulletins/ib_mfprospectus2.html)."
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12B-1 Fund
|
# 12b-1 Fund: What It Means and how It Works
## What Is a 12b-1 Fund?
A 12b-1 fund is a mutual fund that charges its holders a 12b-1 fee. A [12b-1 fee](https://www.investopedia.com/terms/1/12b-1fees.asp) pays for a mutual fund’s distribution and marketing costs. It is often used as a commission to brokers for selling the fund.
12b-1 funds take a portion of investment assets held and use them to pay expensive fees and distribution costs. These costs are included in the fund's expense ratio and are described in the prospectus. 12b-1 fees are sometimes called a “[level load](https://www.investopedia.com/terms/l/levelload.asp).”
### Key Takeaways
* A 12b-1 fund carries a 12b-1 fee, which covers a fund's sales and distribution costs.
* This fee is a percentage of the fund's market value, as opposed to funds that charge a load or sales fee.
* 12b-1 fees include the cost of marketing and selling fund shares, paying brokers and other sellers of the funds, as well as advertising costs, such as printing and mailing fund prospectuses to investors.
* Once popular, 12b-1 funds have lost investor interest in recent years, particularly amid the rise of exchange-traded funds (ETFs) and low-cost mutual funds.
## Understanding 12b-1 Funds
The name 12b-1 comes from the [Investment Company Act of 1940](https://www.investopedia.com/terms/i/investmentcompanyact.asp)'s Rule 12b-1, which allows fund companies to act as distributors of their own shares. Rule 12b-1 further states that a mutual fund's own assets can be used to pay distribution charges.
Distribution fees include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. The SEC does not limit the size of [12b-1 fees that funds may pay](https://www.investopedia.com/articles/mutualfund/13/12b1-understanding-mutual-fund-fees.asp), but under [FINRA](https://www.investopedia.com/terms/f/finra.asp) rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75% of a fund’s average net assets per year.
## 12b-1 Fees
Some 12b-1 plans also authorize and include "shareholder service fees," which are fees paid to persons to respond to investor inquiries and provide investors with information about their investments. A fund may pay shareholder service fees without adopting a 12b-1 plan. If shareholder service fees are part of a fund’s 12b-1 plan, these fees will be included in this category of the fee table.
If shareholder service fees are paid outside a 12b-1 plan, then they will be included in the "Other expenses" category, discussed below. FINRA imposes an annual 0.25% cap on shareholder service fees (regardless of whether these fees are authorized as part of a 12b-1 plan).
Originally, the rule was intended to pay advertising and marketing expenses; today, however, a very small percentage of the fee tends to go toward these costs.
> **Important**
>
> 0.75% is the current maximum amount of a fund's net assets that an investor can be charged as a 12b-1 fee.
## Special Considerations
12b-1 funds have fallen out of favor in recent years. The growth in [exchange-traded fund](https://www.investopedia.com/terms/e/etf.asp) (ETF) options and the subsequent growth of low-fee mutual fund options has given consumers a wide range of option. Notably, 12b-1 fees are considered a dead weight, and experts believe consumers who shop around can find comparable funds to ones charging 12b-1 fees.
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130-30 Strategy
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# Understanding the 130-30 Strategy: Investing Benefits & Risks
## What Is the 130-30 Strategy?
The 130-30 strategy is a long/short equity strategy used by institutional investors. It allocates 130% of starting capital to long positions and shorts poor performing stocks for the required 30% extra investment. The 130-30 strategy targets capital efficiency with financial leverage by reinvesting the shorting proceeds in top-performing stocks. Investors often mimic indices like the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) to select stocks for this strategy.
### Key Takeaways
* The 130-30 strategy uses financial leverage by shorting poor-performing stocks to buy shares expected to yield high returns.
* Investors typically allocate 130% of starting capital to long positions and gain 30% from shorting stocks.
* This strategy mimics indices like the S&P 500 to optimize stock selection.
* Shorting stocks involves significant risks, including potential unlimited losses.
* While often providing lower volatility, 130-30 funds might not surpass major indexes in total return.
## How the 130-30 Strategy Works
To engage in a 130-30 strategy, an investment manager might rank the stocks used in the S&P 500 from best to worse on expected return, as signaled by past performance. A manager will use a number of data sources and rules for ranking individual stocks. Typically, stocks are ranked according to some set selection criteria (for example, total returns, risk-adjusted performance, or relative strength) over a designated look-back period of six months or one year. The stocks are then ranked best to worst.
From the [best ranking stocks](https://www.investopedia.com/best-performing-s-and-p-500-stocks-8720206), the manager would invest 100% of the portfolio's value and short sell the bottom ranking stocks, up to 30% of the portfolio's value. The cash earned from the [short sales](https://www.investopedia.com/terms/s/shortsale.asp) would be reinvested into top-ranking stocks, allowing for greater exposure to the higher-ranking stocks.
## The Role of Shorting Stocks in the 130-30 Strategy
The 130-30 strategy incorporates short sales as a significant part of its activity. Shorting a stock entails borrowing securities from another party, most often a broker, and agreeing to pay an interest rate as a fee. A negative position is subsequently recorded in the investor’s account. The investor then sells the newly acquired securities on the [open market](https://www.investopedia.com/terms/o/open-market.asp) at the current price and receives the cash for the trade. The investor waits for the securities to depreciate and then re-purchases them at a lower price. At this point, the investor returns the purchased securities to the broker. In a reverse activity from first buying and then selling securities, shorting still allows the investor to profit.
Short selling is much riskier than investing in long positions in securities; thus, in a 130-30 investment strategy, a manager will put more emphasis on long positions than short positions. Short-selling puts an investor in a position of unlimited risk and a capped reward. For example, if an investor shorts a stock trading at $30, the most they can gain is $30 (minus fees), while the most they can lose is infinite since the stock can technically increase in price forever.
Hedge funds and mutual fund firms have begun offering investment vehicles in the way of private equity funds, mutual funds, or even exchange-traded funds that follow variations of the 130-30 strategy. In general, these instruments have lower volatility than benchmark indexes but often fail to achieve greater total returns.
## The Bottom Line
The 130-30 strategy puts financial leverage to work by shorting underperforming stocks and reinvesting the capital received into higher-performing stocks. The strategy's goal is to achieve efficient capital allocation while addressing risk through a balance of long and short positions. Since stock selection is important, users of the strategy often adopt a methodology that's similar to that used for tracking indexes like the S&P 500. While the 130-30 strategy can limit drawdowns and provide better risk-adjusted returns, it may not consistently outperform the total returns provided by major market averages. Certain investments, such as hedge funds and mutual funds, implement variations of the 130-30 strategy, and typically offer lower volatility but varied performance outcomes.
> **Article Sources**
>
> 1. Armfelt, C. A. R. L., & Somos, D. A. N. I. E. L. (2008). _Performance, Benefits and Risks of Active-Extension Strategies_. Working Paper available at Stockholm School of Economics
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18-Hour City
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# 18-Hour City: What it Means, How it Works, Examples
## What Is an 18-Hour City?
Economists and real estate investors use the term 18-hour city to describe a mid-size city with attractive amenities, higher-than-average population growth, and a lower [cost of living](https://www.investopedia.com/terms/c/cost-of-living.asp) and cost of doing business than the biggest urban areas. The 18-hour city generally has a population of under one million, making it a second-tier city.
Eighteen-hour cities in the U.S. are increasingly seen as viable alternatives for investment and living to the Big Six markets of Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C that make up America's first-tier or 24-hour cities.
## Understanding the 18-Hour City
While loosely defined, the term 18-hour city most often refers to a city that has public services, amenities and job opportunities that are comparable in quality to those in the big six markets.
### Key Takeaways
* Eighteen-hour cities are vibrant smaller metro areas that are proving attractive to new residents, entrepreneurs and investors.
* They boast lower living costs along with solid infrastructure and appealing amenities.
* Many have emerged as alternatives to big cities for starting or relocating a business or investing in real estate.
Unlike the biggest cities, most of their services and amenities don't operate on a 24-hour basis. However, they boast comparable advantages, including solid public transportation systems, modern infrastructure and strong economies. Housing prices are moderate in comparison.
### The 18-Hour City Advantage
Eighteen-hour cities have emerged as an attractive alternative to big cities for starting a new business, relocating an existing one, or investing in real estate. They typically feature lower [capitalization rate](https://www.investopedia.com/terms/c/capitalizationrate.asp) compression, meaning property values tend to remain stable rather than spiking up or down significantly.
Like first-tier cities, 18-hour cities often boast low real estate vacancy rates along with favorable supply concentrations, rental growth and absorption trends—all indicators of long-term real estate investment potential.
Aside from the numbers, Forbes.com cites a distinctive and lovable culture as a key factor in creating and maintaining a vibrant 18-hour city: "Austin is the live music capital of the world. Denver and the Research Triangle are outdoor meccas. Portland is just plain weird (and residents would like to keep it that way."
One perceived downside is the increased risk inherent in cities that do not have the established track record of primary market cities.
## Examples of 18-Hour Cities in the U.S.
CrowdStreet, a site for crowd-sourced real estate investments, cites Austin, Denver, and Nashville as recent stars among 18-hour cities. In 2020, it identified Charleston, South Carolina, as the next big success story in the category.
> **Important**
>
> The stars among 18-hour cities are a draw for millennials turned off by big-city obstacles.
Realtor.com identified its top metropolitan areas for 2020 and beyond, with all of its top five picks squarely in the 18-hour city category. They include Boise, Idaho; Mc-Allen-Edinburg-Mission, Texas; Tucson, Arizona; Chattanooga, Tennessee, and Columbia, South Carolina.
The National Real Estate Investor website chose Charleston, Kansas City, and Columbus, Ohio, based on their stellar growth in jobs.
### Follow the Millennials
These and other frequently-cited 18-hour city stars have become targets for millennials whose goal is launching or advancing their careers. They are characterized by the availability of recreation and entertainment opportunities that extend well beyond what the typical second-tier affords.
Employers are drawn to 18-hour cities because doing business is less expensive in these markets and this, in turn, attracts large numbers of job seekers and entrepreneurs.
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183-Day Rule
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# 183-Day Rule: Definition, How It's Used for Residency, and Example
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*— Investopedia / Julie Bang*
## What Is the 183-Day Rule?
The 183-day rule refers to a threshold used by most countries to determine whether an individual should be considered a resident for tax purposes. This number is often used in a tax context because it marks the point at which someone has spent more than half the calendar year in a particular jurisdiction.
In the U.S., the [Internal Revenue Service](https://www.investopedia.com/terms/i/irs.asp) (IRS) uses a formula to determine whether people who are neither U.S. citizens nor permanent residents should be considered residents for taxation. This is called the "substantial presence test." One of its criteria includes the question of whether an individual has spent 183 days in the U.S. based on a calculation that considers their combined physical presence in a given tax year and the two years prior.
### Key Takeaways
* The 183-day rule refers to criteria used in many countries to determine tax residency of individuals.
* In general, individuals are considered residents if they are physically present in a country for at least 183 days in a calendar year.
* The U.S. Internal Revenue Service uses a more complicated formula, which considers both presence in a given year, as well as a fraction of presence in the two prior years.
* The U.S. has [tax treaties](https://www.investopedia.com/terms/t/taxtreaty.asp) with other countries which concern what taxes individuals owe and to whom, as well as what exemptions may apply.
* U.S. citizens and residents may exclude up to $126,500 of their foreign-earned income in 2024 if they meet the physical presence test for and paid taxes in a foreign country.
## Understanding the 183-Day Rule
Many countries around the world use the 183-day threshold to broadly determine whether to tax someone as a resident, because it marks the majority of a year. These include Canada, Australia, and the United Kingdom, for example. Generally, this means that if you spent 183 days or more in the country during a given year, you are considered a [tax resident](https://www.investopedia.com/terms/t/taxhome.asp) for that year.
Each nation maintaining a 183-day rule has its own criteria for applying it in practice. For example, some use the calendar year for the accounting period, whereas others use a fiscal year. Some include the day the person arrives in the country, others do not.
Some countries have even lower thresholds that trigger tax residency. For example, Switzerland considers you a tax resident if you have spent more than 90 days there.
## The IRS and the 183-Day Rule
The IRS uses a more complicated formula to determine whether someone passes its substantial presence test, and is subject to U.S. taxes, as a result. The person in question must:
* Have been physically present for at least 31 days during the current year; and
* Be present for 183 days during the three-year period that includes the current year and the two years immediately preceding it.
The 183-day presence threshold is not based off a total sum of days present. Rather, it is calculated by adding the following:
* All of the days an individual was present during the current year
* One-third of the days they were present during the previous year
* One-sixth of the days they were present in the year before that
## Other IRS Terms and Conditions
The IRS generally considers someone to have been present in the U.S. on a given day if they spent any part of a day there. But there are some exceptions.
Days that do not count as days of presence include:
* Days that you commute to work in the U.S. from a residence in Canada or Mexico if you do so regularly
* Days you are in the U.S. for less than 24 hours while in transit between two other countries
* Days you are in the U.S. as a crew member of a foreign vessel
* Days you are unable to leave the U.S. because of a medical condition that develops while you are there
* Days in which you qualify as exempt, which includes foreign-government-related persons under an A or G visa, teachers and trainees under a J or Q visa; a student under an F, J, M, or Q visa; and a professional athlete competing for charity
## U.S. Citizens and Resident Aliens
Strictly speaking, the 183-day rule does not apply to U.S. citizens and permanent residents, who are required to file tax returns regardless of their country of residence or the source of their income.
However, such individuals may exclude at least part of their overseas earned income (up to $126,500 in 2024) from taxation provided they meet a physical presence test in a foreign country and paid taxes there. To meet this physical presence test, the person needs to be present in the country for 330 complete days in 12 consecutive months.
> **Important**
>
> Individuals residing in another country in violation of U.S. law will not be allowed to have their incomes qualify as foreign-earned.
## U.S. Tax Treaties and Double Taxation
The U.S. has [tax treaties](https://www.investopedia.com/terms/t/taxtreaty.asp) with other countries that help determine jurisdiction for income tax purposes and to avoid double taxation. These agreements contain provisions for the resolution of conflicting claims of residence.
## How Many Days Can You Be in the U.S. Without Paying Taxes?
The IRS considers you a U.S. resident if you were physically present in the U.S. on at least 31 days of the current year and 183 days during a three-year period. The three-year period consists of the current year and the prior two years. The 183-day rule includes all the days present in the current year (year 3), 1/3 of the days you were present in year 2, and 1/6 of the days you were present in year 1.
## How Long Do You Have to Live in a State Before You’re Considered a Resident?
Many states use the 183-day rule to determine residency for state tax purposes, and what constitutes a day varies among states. For instance, any time spent in New York, except for travel to destinations outside of New York (e.g., airport travel), is considered a day. So, [if you work in Manhattan but live in New Jersey](https://www.investopedia.com/investing/benefits-living-nj-while-working-nyc/), you may still be considered a New York resident for tax purposes even if you never spend one night there.
In addition, some states have special agreements whereby a resident who works in another state is only required to pay taxes in the state of their permanent residence, or where they are domiciled. It is important to consult the laws of each state that you frequent to determine if you are required to pay their income taxes.
## How Do I Calculate the 183-Day Rule?
For most countries that apply a 183-day rule, you are a tax resident of that country if you spend 183 or more there. The United States, however, has a different criteria for applying a tax residency test. You are a tax resident if you were physically present in the U.S. for 31 days of the current year and 183 days in the last three years, including all days present in the current year, 1/3 of the days from the previous year, and 1/6 of the days from the year before that.
## The Bottom Line
The 183-day rule refers to a common test used to determine tax residency. In most countries, individuals who are physically present for 183 days or more are considered residents for tax purposes. In the U.S., a "substantial presence test" is used to determine tax residency, and it's slightly more tricky than the common 183-day rule. It considers time spent in the U.S. in a given year, in addition to fractions of time spent in the U.S. in the two years prior. Lastly, many states use a 183-day rule to determine residency for local tax purposes. Consulting local and federal tax regulations and international tax treaties can help an individual determine their total tax obligations.
> **Article Sources**
>
> 1. IRS. "[Substantial Presence Test](https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test)."
>
> 2. Internal Revenue Service. "[Figuring the Foreign Earned Income Exclusion](https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion)."
>
> 3. Globalization Guide. "[The Ultimate Guide to Tax Residencies & The 183-Day Rule](https://globalisationguide.org/tax/183-day-rule/)."
>
> 4. IRS. "[Foreign Earned Income Exclusion](https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion)."
>
> 5. Internal Revenue Service. "[Exceptions to the Bona Fide Residence and the Physical Presence Tests](https://www.irs.gov/individuals/international-taxpayers/exceptions-to-the-bona-fide-residence-and-the-physical-presence-tests)."
>
> 6. Monaeo. "[The 183-Day Rule: 5 Things to Know When Establishing State Residency and Fighting Audits](https://blog.monaeo.com/the-183-day-rule-5-things-to-know-when-establishing-state-residency-and-fighting-audits)."
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1979 Energy Crisis
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# 1979 Energy Crisis: Definition, History, Causes, and Impact
> **Definition**
>
> The 1979 energy crisis was a global event marked by a sharp rise in oil prices and panic buying, mainly due to geopolitical turmoil in Iran that disrupted crude oil supply.
## What Was the 1979 Energy Crisis?
The 1979 energy crisis, the [second of two oil price shocks](https://www.investopedia.com/1973-energy-crisis-definition-5222090) in the '70s, resulted in a widespread panic about potential gasoline shortages, and far higher prices for both [crude oil](https://www.investopedia.com/terms/c/crude-oil.asp) and refined products. Oil output declined by only 7% or less, but the short-term supply disruption led to a spike in prices, panic buying, and long lines at gas stations.
### Key Takeaways
* The energy crisis of 1979 was one of two oil price shocks during the 1970s—the other was in 1973.
* Higher prices and concerns about supplies led to panic buying in the gasoline market.
* Crude oil prices nearly doubled to almost $40 per barrel in twelve months.
* The energy crisis of 1979 led to the development of smaller, more fuel-efficient vehicles.
* OPEC's market share fell sharply and utility companies moved toward alternative energy sources.
## Understanding the 1979 Energy Crisis
The 1979 energy crisis occurred in the aftermath of the Iranian Revolution, which started in early 1978 and ended in early 1979 with the fall of Shah Mohammad Reza Pahlavi, the state’s monarch. Turmoil in Iran, a major petroleum [exporting](https://www.investopedia.com/terms/e/export.asp) country, caused the global [supply](https://www.investopedia.com/terms/s/supply.asp) of crude oil to decline significantly, triggering noteworthy shortages, and a surge in panic buying—within 12 months, the price per barrel of this widely used resource almost doubled to $39.50.
Short-run disruptions in the global supply of gasoline and diesel fuel were particularly acute in the spring and early summer of 1979. Several states responded by [rationing](https://www.investopedia.com/terms/r/rationing.asp) gasoline, including California, New York, Pennsylvania, Texas, and New Jersey. In these populous states, consumers could only purchase gas every other day, based on whether the last digit of their license plate numbers was even or odd.
The gasoline shortage also led to fears that [heating oil](https://www.investopedia.com/terms/c/commoditiesexchange.asp) might be in short supply through the 1979-1980 winter. This prospect was especially concerning for New England states, where demand for home heating oil was the highest.
## Special Considerations
It would be erroneous to blame the crisis solely on the fall of the Shah. Notably, the U.S. faced more-acute pain from the crisis than other developed countries in Europe, which also depended on oil from Iran and other Middle East countries. Part of the reason behind the crisis had to do with [fiscal policy](https://www.investopedia.com/terms/f/fiscalpolicy.asp) decisions in the U.S.
### U.S. Fiscal Policy Also to Blame
In early 1979, the U.S. government [regulated](https://www.investopedia.com/terms/r/regulated-market.asp) oil prices. Regulators ordered refiners to restrict the supply of gasoline in the early days of the crisis to build [inventories](https://www.investopedia.com/terms/i/inventory.asp), directly contributing to higher [prices at the pump](https://www.investopedia.com/articles/economics/08/determining-oil-prices.asp).
Another factor was unintended supply restriction after the [Department of Energy](https://www.investopedia.com/insights/what-does-secretary-energy-do/) (DOE) decided to make a handful of large U.S. [refiners](https://www.investopedia.com/terms/o/oil-refinery.asp) sell crude to smaller refiners who could not find a ready supply of oil. Because smaller refiners had limited production capabilities, the decision further delayed gasoline supply.
[Monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp) leading up to the crisis also seemingly played a role to a degree. The [Federal Open Market Committee](https://www.investopedia.com/terms/f/fomc.asp) (FOMC) was reluctant to raise target interest rates too quickly and this hesitation contributed to rising inflation late in the decade. The jump in inflation was accompanied by higher prices for energy and a range of other consumer products and services.
## Benefits of the 1979 Energy Crisis
Amid the crisis, politicians actively encouraged consumers to conserve energy and limit unnecessary travel. In subsequent years, the 1979 crisis led to the sale of more compact and subcompact vehicles in the U.S. These smaller vehicles had smaller engines and provided better fuel economy.
In addition, the crisis prompted [utility companies](https://www.investopedia.com/terms/u/utilities_sector.asp) worldwide to seek out alternatives to crude oil generators, including nuclear power plants, and governments to spend billions on the research and development (R&D) of [other fuel sources](https://www.investopedia.com/ask/answers/060415/what-are-main-substitutes-oil-and-gas-energy.asp).
Combined, these efforts resulted in daily worldwide oil consumption declining in the six years following the crisis. Meanwhile, the [Organization of Petroleum Exporting Countries](https://www.investopedia.com/terms/o/opec.asp) (OPEC) global [market share](https://www.investopedia.com/terms/m/marketshare.asp) fell to 29% in 1985, down from 50% in 1979.
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2-2-8 Adjustable-Rate Mortgage (2/28 ARM): Meaning, How It Works
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# 2-2-8 Adjustable-Rate Mortgage (2/28 ARM): Meaning, How It Works
Homebuyers face may choices in types of mortgages, from longer-term fixed rate loans to shorter-term adjustable-rate loans. A 2/28 adjustable-rate mortgage is one type of adjustable rate mortgage that is less common than the traditional 30-year fixed mortgage, but it may suit some buyers' needs.
A 2/28 mortgage essentially offers a two-year [fixed interest rate](https://www.investopedia.com/terms/f/fixedinterestrate.asp) followed by a floating rate for 28 years. Learn how this type of mortgage works, and more about the pros and cons.
## What Is a 2/28 Adjustable-Rate Mortgage (2/28 ARM)?
A 2/28 [adjustable-rate mortgage](https://www.investopedia.com/terms/a/arm.asp) (2/28 ARM) is a type of 30-year home loan that has an initial two-year fixed interest rate period. After this two-year period, the rate floats based on an index rate plus a [margin](https://www.investopedia.com/terms/a/armmargin.asp).
The initial teaser rate is typically below the average rate of conventional mortgages, but the adjustable rate can then rise significantly. Since banks don’t make much money on the initial teaser rate, 2/28 ARMs include hefty [prepayment penalties](https://www.investopedia.com/terms/p/prepaymentpenalty.asp) during the first two years.
### Key Takeaways
* 2/28 adjustable-rate mortgages (ARMs) offer an introductory fixed rate for two years, after which the interest rate adjusts semiannually for 28 more years.
* When ARMs adjust, interest rates change based on their marginal rates and the indexes to which they’re tied.
* Homeowners generally have lower mortgage payments during the introductory period, but are subject to interest rate risk afterward.
## Understanding 2/28 Adjustable-Rate Mortgages (2/28 ARMs)
The 2/28 ARMs became popular during the real estate boom of the early 2000s, when soaring prices put [conventional mortgage](https://www.investopedia.com/terms/c/conventionalmortgage.asp) payments out of reach for many buyers.
Other ARM structures exist, such as [5/1](https://www.investopedia.com/terms/1/5-1_arm.asp), 5/5, and [5/6 ARMs](https://www.investopedia.com/terms/1/5-6_hybrid_arm.asp), which feature a five-year introductory period followed by a rate adjustment every five years or every six months, respectively. Notably, 15/15 ARMs adjust once after 15 years and then remain fixed for the remainder of the loan.
Less common are the 2/28 and [3/27 ARMs](https://www.investopedia.com/terms/1/327arm.asp). With the former, the fixed interest rate applies for only the first two years, followed by 28 years of adjustable rates. With the latter, the fixed rate is for three years, with adjustments in each of the following 27 years. In these cases, rates adjust semiannually.
## Example of 2/28 ARM
For example, let's say you are buying a $350,000 home and providing a down payment of $50,000. You have a $300,000 2/28 ARM mortgage with an initial interest rate of 5% and monthly payments of $1,906. (Total monthly mortgage payments vary when property taxes and insurance costs are factored in. This example assumes $230 per month in property tax and $66 per month in insurance costs.)
With a 2/28 ARM, your interest rate of 5% remains fixed for two years. Then, it can change based on changes in a [broader index rate](https://www.investopedia.com/terms/a/arm_index.asp). Let's say your interest rate then rises to 5.3%. Your total monthly costs would rise to $1,961. Your interest rate would continue to change over the remainder of the loan depending on the broader index. So, the total costs of the loan would be difficult to estimate.
In comparison, if you had a 30-fixed mortgage on the same loan with 5% interest, you would pay $1,906 per month and you can expect to pay $279,987 in total interest if you did not pay the loan off early.
## Risks of 2/28 ARMs
The risk with an adjustable-rate mortgages like an 2/28 ARM is the potential for the rate to increase. After two years, the rate is adjusted every six months, typically upward, by a margin above an index rate, such as the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) or the [Secured Overnight Financing Rate (SOFR)](https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954). 2/28 ARMs have some built-in safety features, such as a [lifetime interest rate cap](https://www.investopedia.com/terms/l/lifetimecap.asp) and limits on how much the rate can change with each period. But even with caps, homeowners can face significant payment spikes in [volatile](https://www.investopedia.com/terms/v/volatility.asp) markets.
During the boom, many homeowners failed to understand how a seemingly small rate increase could dramatically boost their monthly payment. And even many of those who were fully aware of the risks viewed 2/28 ARMs as a short-term financing vehicle. The idea was to take advantage of the low teaser rate, then [refinance](https://www.investopedia.com/terms/r/refinance.asp) after two years to either a conventional mortgage. Or, if their credit was not good enough, they would refinance to a new adjustable mortgage. Amid spiking real estate prices, this strategy kicked the debt further down the road. To many, this made a certain amount of sense since, after all, the borrower’s [home equity](https://www.investopedia.com/terms/h/home_equity.asp) was rising fast.
But with the [market collapse](https://www.investopedia.com/terms/c/credit-crisis.asp) in 2008, home values plummeted. Many owners with 2/28 ARMs found were unable to refinance, make their payments, or sell their homes for the value of the outstanding loan. The rash of [foreclosures](https://www.investopedia.com/terms/f/foreclosure.asp) led to stricter loan standards. Today, banks more carefully evaluate a borrower’s ability to make adjustable-rate payments.
## 2/28 ARM vs. Fixed Rate Mortgage
Adjustable-rate mortgages like a 2/28 ARM work differently than fixed-rate mortgages and this difference is important to understand for planning your long-term finances.
An adjustable rate mortgage will have an interest rate that can change. That means your monthly payments can change and the overall total interest you will pay is unpredictable. Because the interest can change, you will need to prepare for the possibility that you will have to make higher monthly payments.
In contrast, interest on a fixed-rate mortgage does not change. You can plan for the same monthly payment for the life of the loan. A 2/28 ARM offers the fixed rate for only the first two years, after which the rate can adjust.
## Is a 2/28 Adjustable-Rate Mortgage Right for You?
A 2/28 adjustable-rate mortgage has advantages and disadvantages that make it ideal for some buyers but not for others. Weigh the pros and cons with your own financial situation to determine if this type of mortgage is right for you.
You may benefit from a 2/28 ARM if you need a lower monthly payment at the beginning of your mortgage and if you believe you will be able to make higher monthly payments in the future. However if you can afford a higher monthly payment, you may save more money in total interest costs with other loan options, such as a 15-year fixed-rate loan.
## What Are the Disadvantages of an Adjustable-Rate Mortgage?
An adjustable-rate mortgage can provide lower monthly payments at the beginning of the loan, but borrowers need to prepare for the potential that their payments can increase. If the interest rate increases, then monthly costs and total borrowing costs increase.
## What Is a 5/1 ARM With a 30-Year Term?
With a 5/1 adjustable-rate mortgage (ARM), your interest rate is fixed, or remains the same, for the first five years. Then, it adjusts once a year. When these mortgages have a 30-year term, that means you will have a fixed interest rate for five years and an adjustable rate for the next 25 years. These loans are also known as [5/1 hybrid adjustable-rate mortgages](https://www.investopedia.com/terms/1/5-1_arm.asp).
## Can You Pay off an ARM Loan Early?
Whether you can pay off an adjustable-rate mortgage (ARM) early depends on the terms of your loan. With some ARMs, you may face a prepayment penalty if you pay the loan off early, including if you sell the home or refinance the loan.
## The Bottom Line
A 2/28 adjustable-rate mortgage (ARM) is a variable-rate home loan that has a set rate for the first two years and then a floating rate for the next 28 years. It is an alternative to a 30-year fixed mortgage that, while less common, can be more suitable for certain buyers. Like any mortgage, it has advantages and disadvantages.
> **Article Sources**
>
> 1. U.S. Department of Housing and Urban Development. “[Adjustable Rate Mortgages (ARM)](https://www.hud.gov/program_offices/housing/sfh/ins/203armt).”
>
> 2. Center for American Progress. “[The 2008 Housing Crisis](https://www.americanprogress.org/issues/economy/reports/2017/04/13/430424/2008-housing-crisis/).”
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2-1 Buydown
|
# What Is a 2-1 Buydown Loan and How Do They Work?
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*— Investopedia / Michela Buttignol*
A 2-1 buydown is a [mortgage](https://www.investopedia.com/terms/m/mortgage.asp) agreement that provides a low interest rate for the first year of the loan, a somewhat higher rate for the second year, and then the full rate for the third and later years. Borrowers or home sellers pay additional money upfront to earn the lower rate for those first two years.
### Key Takeaways
* A 2-1 buydown is a type of financing that lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate.
* The rate is typically two percentage points lower during the first year and one percentage point lower in the second year.
* Sellers, including home builders, may offer a 2-1 buydown to make a property more attractive to buyers.
* 2-1 buydowns can be a good deal for homebuyers, provided that they will be able to afford the higher monthly payments once those begin.
:max_bytes(150000):strip_icc()/2-1_buydown.asp-final-d03c18fb13aa44669cb2c713a3733844.png)
*— Investopedia / Mira Norian*
## How 2-1 Buydowns Work
A buydown is a real estate financing technique that makes it easier for a borrower to qualify for a mortgage with a lower interest rate. That lower rate can last for the duration of the mortgage (as is often the case when borrowers pay extra [points](https://www.investopedia.com/mortgage/mortgage-rates/points/) up ront to the lender) or for a particular period of time. A 2-1 buydown is one kind of temporary buydown, in this case lasting for two years.
In a 2-1 buydown, the interest rate increases from one year to the next until it settles into its permanent rate in year three. Lenders charge an additional fee to compensate for the interest they won’t be receiving in those early years.
Sellers, including home builders, often use 2-1 buydowns as an incentive for potential purchasers.
> **Fast Fact**
>
> Either a homebuyer or a home seller can pay for a buydown. That payment may be in the form of mortgage points or a lump sum deposited in an escrow account with the lender and used to subsidize the borrower’s reduced monthly payments.
## Example of a 2-1 Buydown Mortgage
Suppose a real estate developer offers a 2-1 buydown on its new home. If the prevailing interest rate on 30-year mortgages is 5%, a homebuyer could get a mortgage that charges just 3% in the first year, 4% in the second year, and 5% after that.
If the homebuyer took out a $200,000, 30-year mortgage, for example, their monthly payment would be $843 during the first year. In the second year, they would pay $995. After the end of the second year, their monthly payment would rise to $1,074, where it would stay for the remainder of the mortgage.
## 2-1 Buydown Pros and Cons
For home sellers, a 2-1 buydown can help by making it easier and sometimes faster to sell their homes for a good price. The downside, of course, is that it comes at a cost, which ultimately reduces their net profit from the sale.
For homebuyers, a 2-1 buydown has several potential benefits. It can help them afford a larger mortgage and a more expensive home than they might otherwise qualify for. It also buys them some time before their mortgage payments rise to the full amount, which can be helpful if their income is also rising from year to year.
> **Warning**
>
> The downside for homebuyers is the risk that their income won’t keep pace with those increasing mortgage payments. In that case, they might find themselves stretched too thin and even have to sell the home.
## When to Use a 2-1 Buydown
Home sellers who are having difficulty selling and need to provide an incentive to find a buyer may want to consider offering (and paying for) a 2-1 buydown.
Borrowers may benefit from a buydown if it allows them to buy the home they want at a price they can afford. However, they will also want to consider what would happen if their income doesn’t rise fast enough to keep up with their future monthly payments.
Buyers should also make sure that they are getting a fair deal on the home in the first place. That’s because some sellers might increase the home’s price to make up for the cost of the 2-1 buydown.
Note that buydowns may not be available under some state and federal mortgage programs or from all lenders. A 2-1 buydown is available on fixed-rate [Federal Housing Administration (FHA)](https://www.investopedia.com/terms/f/federal-housing-administration.asp) loans, but only for new mortgages and not for refinancing. Terms can also vary from lender to lender.
## What Is a Buydown?
A buydown is a means of [paying for a lower interest rate](https://www.investopedia.com/terms/b/buydown.asp), often on a mortgage. A 2-1 buydown is just one example of this type of transaction. There also are buydowns that will lower rates for different periods of time or even for the duration of the mortgage.
## Is a Buydown a Good Deal?
It depends on the circumstances. The most important factor with a 2-1 buydown is to be prepared for what mortgage payments will be after the first two years. That's the payment you'll be responsible for making for the bulk of the mortgage. If you plan for that, it definitely can be a good deal.
## Who Pays for a 2-1 Buydown?
Either the buyer or the seller can pay for the buydown. Buyers might be willing to pay for it to save on interest payments. Sellers might be willing to pay for it to make a home easier to sell.
## The Bottom Line
A 2-1 buydown lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate for the third year and beyond. A typical 2-1 buydown offers a reduction of two percentage points the first year and one percentage point the second year.
Borrowers can pay for a 2-1 buydown, but sellers, including home builders, may also offer one to make a property more attractive. These transactions can be a good deal for homebuyers if they can afford the higher monthly payments that will begin in year three.
> **Article Sources**
>
> 1. Federal Housing Finance Agency, Office of Inspector General. "[Temporary Interest Rate, Buydowns](https://www.fhfaoig.gov/sites/default/files/Temporary-Interest-Rate-Buydowns-Dashboard.pdf)." Page 3.
>
> 2. The Mortgage Reports. "[What Is a 2-1 Buydown Loan and How Does It Work?](https://themortgagereports.com/111375/what-is-a-2-1-buydown)"
|
2000 Investor Limit: What It is, How It Works, Example
|
# 2000 Investor Limit: What It is, How It Works, Example
## What Is the 2000 Investor Limit?
The 2,000 Investor Limit is a stipulation required by the [Securities & Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) that mandates a company that exceeds 2,000 individual investors, and with more than $10 million in combined assets, [must file its financials](https://www.investopedia.com/articles/fundamental-analysis/08/sec-forms.asp) with the commission. According to SEC rules, a company that meets these criteria has 120 days to file following its [fiscal year's](https://www.investopedia.com/terms/f/fiscalyear.asp) end.
### Key Takeaways
* The 2,000 investor limit or rule is a key threshold for private businesses that do not wish to disclose financial information for public consumption.
* A business with more than 2,000 distinct shareholders, totaling $10 million or more in capital, must file with the SEC even if it is a privately-held company.
* Congress raised the limit from 500 individual investors to 2,000 investors in 2016 as part of the JOBS and FAST Acts.
* The increased investor limit has opened greater possibility for equity crowdfunding.
## Understanding the 2000 Investor Limit
The 2,000 investor limit or rule is a key threshold for private businesses that do not wish to disclose financial information for public consumption. Congress [raised the limit](https://www.sec.gov/info/smallbus/secg/jobs-act-section-12g-small-business-compliance-guide) from [500 individual shareholders](https://www.investopedia.com/terms/5/500-shareholder-threshold.asp) in 2016 as part of the Jumpstart Our Business Startups ([JOBS](https://www.investopedia.com/terms/j/jumpstart-our-business-startups-act-jobs.asp)) Act and Title LXXXV of the Fixing America’s Surface Transportation (FAST) Act. The revised rules also specify a limit of 500 persons who are not [accredited investors](https://www.investopedia.com/terms/a/accreditedinvestor.asp) before public filing is required.
The prior threshold had been 500 [holders of record](https://www.investopedia.com/terms/h/holderofrecord.asp) without regard to accredited investor status. Congress began debating an increase in the limit in the wake of the 2008 recession and an explosion in online businesses (some of which complained that they were growing so fast that the disclosure rules had become a burden at too early a stage of their lifecycle).
The JOBS Act also set up a separate registration threshold for banks and bank [holding companies](https://www.investopedia.com/terms/h/holdingcompany.asp), allowing them to terminate the registration of securities or suspend reporting if that class of shares is held by less than 1,200 people.
## Investor Thresholds and Equity Crowdfunding
The JOBS Act revisions to SEC rules helped facilitate the growth of [crowdfunding](https://www.investopedia.com/terms/c/crowdfunding.asp) platforms. These platforms are able to raise money from individual investors online without providing detailed financial data. The rules established limits on how much individuals can invest in SEC-approved crowdfunding platforms as a percent of the lesser of their annual income or [net worth](https://www.investopedia.com/terms/n/networth.asp).
The individual limits for crowdfunding, through an investment portal approved by the SEC, as of May 2017:
* If either your annual income _or_ your net worth is under $107,000, during any 12-month period, you can invest up to the greater of either $2,200 or 5 percent of the lesser of your annual income or net worth.
* If both your annual income and net worth are $107,000 or more during any 12-month period, you can invest up to 10 percent of your annual income or net worth, whichever is less, not to exceed $107,000.
These calculations don't include the value of your home.
## Example
For example, suppose that your annual income is $150,000 and your net worth is $80,000. JOBS Act crowdfunding rules allow you to invest the greater of $2,200—or 5% of $80,000 ($4,000)—during a 12-month period. So in this case, you can invest $4,000 over a 12-month period.
> **Article Sources**
>
> 1. Securities and Exchange Commission. "[Exchange Act Reporting and Registration](https://www.sec.gov/smallbusiness/goingpublic/exchangeactreporting)." Accessed Dec. 14, 2020.
>
> 2. Securities and Exchange Commission. "[SEC Adopts Amendments to Implement JOBS Act and FAST Act Changes for Exchange Act Registration Requirements](https://www.sec.gov/news/pressrelease/2016-81.html)." Accessed Dec. 14, 2020.
>
> 3. Securities and Exchange Commission. "[Investor Bulletin: Crowdfunding Investment Limits Increase](https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_crowdfundingincrease)." Accessed Dec. 14, 2020.
>
> 4. Securities and Exchange Commission. "[Regulation Crowdfunding](https://www.sec.gov/smallbusiness/exemptofferings/regcrowdfunding)." Accessed Dec. 14, 2020.
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2011 U.S. Debt Ceiling Crisis: Meaning and Outcome
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# 2011 U.S. Debt Ceiling Crisis: Meaning and Outcome
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*— Bloomberg Creative Photos / Getty Images*
> **Definition**
>
> The 2011 U.S. Debt Ceiling Crisis was a contentious debate in Congress that occurred in July 2011 regarding the maximum amount of debt that the federal government should be allowed.
## What Is the 2011 U.S. Debt Ceiling Crisis?
To resolve the 2011 U.S. Debt Ceiling Crisis over the amount of the national debt, Congress passed the Budget Control Act of 2011. This was one of a series of recurrent debates over increasing the total size of the U.S. national debt.
### Key Takeaways
* In 2008, the federal budget deficit stood at $458.6 billion, which widened to $1.4 trillion the following year as the government spent heavily to boost the economy.
* Congress passed a law to resolve the crisis that increased the debt ceiling by $2.4 trillion.
* As a result of the crisis, the United States’ credit rating was reduced from AAA to AA+ by Standard & Poor’s.
* The 2011 debt ceiling crisis had implications for future debt ceiling discussions.
## How the 2011 U.S. Debt Ceiling Crisis Unfolded
The federal government has rarely achieved a balanced budget, and its [budget deficit](https://www.investopedia.com/terms/b/budget-deficit.asp) ballooned following the [2007–08 financial crisis](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp). In the 2008 fiscal year, the deficit stood at $458.6 billion, widening to $1.4 trillion in 2009 as the government engaged in a massive [fiscal policy](https://www.investopedia.com/terms/f/fiscalpolicy.asp) response to the economic downturn.
From 2008 to 2010, Congress raised the [debt ceiling](https://www.investopedia.com/terms/d/debt-ceiling.asp) from $10.6 trillion to $14.3 trillion. In 2011, as the [economy](https://www.investopedia.com/terms/e/economy.asp) showed early signs of recovery and federal debt approached its limit once again, negotiations began in Congress to balance spending priorities against the ever-rising debt burden.
A heated debate ensued, pitting proponents of spending and debt against fiscal conservatives. Pro-debt politicians argued that failing to raise the limit would require immediate cuts to spending already authorized by Congress, which could result in late, partial, or missed payments to [Social Security](https://www.investopedia.com/terms/s/socialsecurity.asp) and [Medicare](https://www.investopedia.com/terms/m/medicare.asp) recipients, government employees, and government contractors.
Moreover, they asserted that the [Treasury](https://www.investopedia.com/terms/u/ustreasury.asp) could suspend interest [payments on existing debt](https://www.investopedia.com/terms/t/trillion-dollar-coin.asp) rather than withhold funds committed to federal programs. The prospect of cutting back on already-promised spending was labeled a crisis by debt proponents.
On the other hand, the specter of a technical [default](https://www.investopedia.com/terms/d/default2.asp) on existing Treasury debt roiled financial markets. Fiscal conservatives argued that any debt limit increase should come with constraints on the growth of federal spending and debt accumulation.
> **Important**
>
> The U.S. has raised the debt limit 78 times since 1960. Most recently, it raised the debt limit in 2023.
## Outcome of the 2011 U.S. Debt Ceiling Crisis
Congress resolved the debt ceiling crisis by passing the [Budget Control Act of 2011](https://www.investopedia.com/terms/b/budget-control-act.asp), which became law on Aug. 2, 2011. This act allowed the debt ceiling to be raised by $2.4 trillion in two phases, or installments.
In the first phase, a $400 billion increase would occur immediately, followed by another $500 billion unless Congress disapproved it. The second phase allowed for an increase of $1.2 trillion to $1.5 trillion, subject to congressional disapproval as well.
In return, the law included $900 billion in slowdowns in planned spending increases over a 10-year period. It also established a special committee charged with finding at least $1.5 trillion in additional savings.
In effect, the legislation incrementally raised the debt ceiling from $14.3 trillion to $16.4 trillion by Jan. 27, 2012.
Following the passage of the act, [Standard & Poor’s (S&P)](https://www.investopedia.com/terms/s/sp.asp) took the radical step of downgrading the United States’ long-term credit rating from AAA to AA+, even though the U.S. did not default. The S&P report says, “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the (Obama) Administration recently agreed to fall short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” The credit rating agency cited the unimpressive size of deficit reduction plans relative to the likely future prospects for politically driven spending and debt accumulation.
## Debt Approval Process Leading to the 2011 U.S. Debt Ceiling Crisis
The U.S. Constitution gives Congress the power to borrow money. Before 1917, this power was exercised by Congress authorizing the Treasury to borrow specified amounts of debt to fund limited expenses, such as wartime military spending, which would be repaid after the end of hostilities. This kept the national debt directly linked to authorized spending.
In 1917, Congress imposed a limit on federal debt as well as individual issuance limits. In 1939, Congress gave the Treasury more flexibility in how it managed the overall structure of federal debt, giving it an aggregate limit. However, by delegating debt management authority to the Treasury, Congress was able to break the direct connection between authorized spending and the debt that finances it.
While allowing greater flexibility to raise spending, this practice also created a need for Congress to repeatedly raise the debt limit when spending threatens to overrun available [credit](https://www.investopedia.com/terms/c/credit.asp). Due to occasional political resistance to the idea of continually expanding the federal debt, this process of raising the debt limit has at times engendered controversy, which occurred during the 2011 Debt Ceiling Crisis.
## Longer-Term Implications of 2011 Debt Ceiling Crisis
The American economy, politics, and financial markets were all affected in the long run by the country’s 2011 debt limit issue. As mentioned before, Standard & Poor’s downgraded the United States’ credit rating for the first time ever (from AAA to AA+). This resulted in several longer-term implications.
First, the protracted debt ceiling talks and brinkmanship had an adverse effect on consumer and corporate confidence. On Aug. 8, 2011, the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) dropped 79.2 points while the [Nasdaq Composite Index](https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp) dropped 174.72 points. Each of those two indexes lost over 6.6% of its value that day, with the [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp) dropping 634 points, or 5.55%.
Concerns about the long-term viability of U.S. government debt were raised as a result of the debt limit crisis’s failure to address the underlying fiscal issues. The nation’s fiscal stability and long-term economic prospects may be impacted by the unsolved concerns around budget deficits and the national debt. Most recently, the U.S. Senate has increased the debt ceiling limit to $31.4 trillion.
The debt limit issue and the ensuing credit rating cut had some effect on the [U.S. dollar](https://www.investopedia.com/terms/forex/u/usd-united-states-dollar.asp). Even while there may not have been much of an immediate impact, it prompted concerns about the strength and stability of the dollar in the long run.
The debt limit debate also sparked talks about possible adjustments to both the budgetary procedures and the debt ceiling mechanism. Measures have been taken to prevent similar crises in the future, such as changes to the budgeting schedule and discussions about prospective changes to the debt cap structure.
## What Could Happen If Congress Does Not Vote to Raise the Debt Ceiling?
According to U.S. Treasury Secretary [Janet Yellen](https://www.investopedia.com/articles/investing/101613/janet-yellen-background-and-philosophy.asp), failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihood of all Americans, and global financial stability. She also mentioned that the U.S. would risk facing another credit rating downgrade, similar to that of 2011.
## Once the Debt Ceiling Is Reached, What Spending Will Be Cut?
In a letter to the U.S. House of Representatives, Yellen warned congressional leaders that the Treasury would implement extraordinary measures to prevent the U.S. from defaulting on its obligations. In the past, the Treasury has suspended new investments in the [Civil Service Retirement](https://www.investopedia.com/terms/c/csrs.asp) and Disability Fund and the Postal Service Retiree Health Benefits Fund. It also suspended reinvestment of the [Government Securities](https://www.investopedia.com/terms/g/governmentsecurity.asp) Investment Fund of the Federal Employees Retirement System [Thrift Savings Plan](https://www.investopedia.com/ask/answers/102714/thrift-savings-plan-tsp-qualified-retirement-plan.asp). Keep in mind that every debt ceiling debate cycle is unique and may be resolved using unique measures.
## Why Did Increasing the Debt Ceiling Cause Contentious Debate in 2011?
From 2008 to 2010, Congress raised the debt ceiling from $10.6 trillion to $14.3 trillion. In 2011, as the economy showed early signs of recovery and federal debt approached its limit again, negotiations began in Congress to decide spending priorities.
A heated debate ensued between pro-debt politicians and fiscal conservatives. Pro-debt politicians argued that failing to raise the limit could result in late, partial, or missed payments to Social Security and Medicare recipients, government employees, and government contractors. Fiscal conservatives argued that any debt limit increase should come with limits on federal spending and debt accumulation.
## The Bottom Line
Following the 2007–08 Financial Crisis, in an effort to slow down the [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp) as well as the persistently high [unemployment rate](https://www.investopedia.com/terms/u/unemploymentrate.asp), the U.S. government increased federal spending. As a result, the federal debt reached its limit on multiple occasions from 2008 to 2011, which led to a series of increases in the debt limit. In 2011, the Treasury asked for its borrowing capacity to be extended.
The 2011 U.S. Debt Ceiling Crisis was a contentious debate in Congress that occurred in July 2011 regarding the maximum amount of debt that the federal government should be allowed. Congress resolved the debt ceiling crisis by passing the Budget Control Act of 2011, which became law on Aug. 2, 2011. This act allowed the debt ceiling to be raised by $2.4 trillion in two phases, or installments.
> **Article Sources**
>
> 1. The White House, Office of Management and Budget. “[Historical Tables](https://www.whitehouse.gov/wp-content/uploads/2020/02/hist_fy21.pdf),” Page 28.
>
> 2. House Budget Committee Democrats. “[Summary of the Budget Control Act of 2011](https://democrats-budget.house.gov/committee-report/summary-budget-control-act-2011).”
>
> 3. U.S. Government Accountability Office. “[Debt Limit: Analysis of 2011–2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs](https://www.gao.gov/products/gao-12-701).”
>
> 4. FactCheck.org. “[Debt Limit Q&A](https://www.factcheck.org/2021/09/debt-limit-qa/).”
>
> 5. Reuters. “[Biden Signs Debt Limit Bill, Avoiding U.S. Default](https://www.reuters.com/world/us/biden-signs-bill-lifting-us-debt-limit-2023-06-03/).”
>
> 6. Congress.gov, U.S. Congress. “[S.365—Budget Control Act of 2011](https://www.congress.gov/bill/112th-congress/senate-bill/365?q=%7B%22search%22%3A%5B%22cite%3APL112-25%22%5D%7D&s=1&r=1).”
>
> 7. Standard & Poor’s, via The Washington Post. “[Research Update: United States of America Long-Term Rating Lowered to ‘AA+’ on Political Risks and Rising Debt Burden; Outlook Negative](https://www.washingtonpost.com/wp-srv/politics/documents/spratingreport_080611.pdf).”
>
> 8. Congressional Research Service, via Federation of American Scientists, Project on Government Secrecy. “[The Debt Limit Since 2011](https://fas.org/sgp/crs/misc/R43389.pdf),” Page 1 (Page 5 of PDF).
>
> 9. Investors Signals. “[Black Monday 2011, Revisited](https://www.investorsignals.com/2017/08/14/black-monday-2011-revisited/).”
>
> 10. Congress.gov, U.S. Congress. “[S.2168—No Default Act](https://www.congress.gov/bill/118th-congress/senate-bill/2168).”
>
> 11. U.S. Department of the Treasury. “[Debt Limit Letter to Congress 1/13/2023](https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-McCarthy-20230113.pdf?).”
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25% Rule: What it Means, How it Works, Rules
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# 25% Rule: What it Means, How it Works, Rules
## What Is the 25% Rule?
There are two common uses of the "25% rule." One uses it to refer to long-term government debt in relation to its annual budget, and the second is to determine intellectual property royalties.
1. The 25% rule is the concept that a local government's long-term debt should not exceed 25% of its annual budget. Any debt beyond this threshold is considered excessive and poses a potential risk, as the municipality may have trouble servicing the debt.
2. The 25% rule also refers to a technique for determining [royalties](https://www.investopedia.com/terms/r/royalty.asp), which stipulates that a party selling a product or service based on another party's intellectual property must pay that party a royalty of 25% of the [gross profit](https://www.investopedia.com/terms/g/grossprofit.asp) made from the sale, before taxes. The 25% rule also commonly applies to trademarks, copyrights, patents, and other forms of [intellectual property](https://www.investopedia.com/terms/i/intellectualproperty.asp).
### Key Takeaways
* The 25% rule can refer to either public finance or intellectual property law.
* In public finance, the 25% rule prescribes that a public entity’s total debt should not exceed one-quarter of its annual budget.
* In intellectual property, the 25% rule suggests the reasonable royalty that a license should pay an intellectual property holder on profits.
## Understanding the 25% Rule
In both uses of the term, the 25% rule is more a matter of customary practice or [heuristic](https://www.investopedia.com/terms/h/heuristics.asp) (i.e., a [rule of thumb](https://www.investopedia.com/terms/r/rule-of-thumb.asp)), rather than an absolute or optimal threshold, or a strict legal requirement.
In the public finance setting, the 25% rule is a rough guideline for fiscal planning based on the confidence of bondholders and credit rating agencies. In the intellectual property arena, the 25% rule evolved from the customary rates negotiated between intellectual property holders and licensees.
## 25% Rule for Municipal Debt
Local or state governments looking to fund projects through [municipal bond](https://www.investopedia.com/terms/m/municipalbond.asp) issues have to make assumptions about the revenues they expect to bring in, often through taxation or projects like toll roads, which in turn will allow them to support bond payments. If revenue falls short of expectations, those municipalities may not be able to make bond payments, which can cause them to default on their obligations and hurt their [credit rating](https://www.investopedia.com/terms/c/creditrating.asp).
Municipal bondholders want to make sure that the issuing authority has the capacity to pay, which can be jeopardized by getting too deep in debt. Bondholders are thus cautious about purchasing bonds from local or state governments that are in violation of the 25% rule.
Tax-exempt [private activity bonds](https://www.investopedia.com/terms/p/privateactivitybond.asp)—bonds issued by municipalities on behalf of private or non-profit organizations—also have a 25% rule applied to the proceeds from the bonds. This rule states that no more than 25% of bond proceeds may be used for land acquisition.
## 25% Rule for Intellectual Property
[Patent](https://www.investopedia.com/terms/p/patent.asp) or trademark owners use the 25% rule as a yardstick for defining a reasonable amount of royalty payments. The rule assumes that a [licensee](https://www.investopedia.com/terms/l/licensee.asp) should retain at most 75% of the profits of a patented product given that s/he took on the bulk of the risks of developing the product and bringing the intellectual property to the market. The patent owner takes the remainder as a license royalty.
Setting the value of intellectual property is a complex matter. Although royalties are typically assessed against revenues, the 25% rule applies to profits. Furthermore, the 25% rule does not closely define what "gross profit" includes, which creates ambiguity in the valuation calculation. Because it's a simple rule, it does not take into account the costs associated with marketing the product. For example, the holder of a [copyright](https://www.investopedia.com/terms/c/copyright.asp) will receive a 25% royalty, though the party doing the selling usually incurs the cost of attracting demand in the market through advertising.
In the 2011 court case of _Uniloc USA, Inc. v. Microsoft Corp_, the [court of appeals](https://www.investopedia.com/terms/a/appellate-courts.asp) for the Federal Circuit ruled that the 25 percent rule may not be used as a starting point for a patent damage analysis bound for the courtroom. The appeals court concluded that the rule does not rise to an admissible level of evidence and may not be relied upon in a patent lawsuit in federal court. While the 25% rule may still be used by other parties in estimating a proposed patent royalty, it should not be considered a legal mandate.
> **Article Sources**
>
> 1. Internal Revenue Service. "[26 CFR 601.601: Rules and Regulations](https://www.irs.gov/pub/irs-drop/rp-17-13.pdf)," Page 7. Accessed Sept. 29, 2021.
>
> 2. Robert Goldscheider. "[The Classic 25% Rule and The Art of Intellectual Property Licensing](https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1220&context=dltr)," Pages 1-2, 7-9, 14. _Duke Law & Technology Review._ Accessed Sept. 29, 2021.
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