What is 'Manufactured Payment'

A manufactured payment is made to pass through dividend and interest payments from the borrower to the lender of those securities. Manufactured payments, represented as interest or dividend payments, occur frequently in securities lending. In such an arrangement, title to the securities passes to borrower, but the lender customarily maintains the right to payments which accrue on the security.

BREAKING DOWN 'Manufactured Payment'

Short selling is the most common situation in which one must borrow securities and a manufactured payment might be made. In order to sell a stock short, a trader must borrow the stock. Since the short seller has borrowed the security, dividend payments made on the stock during the term of the loan must be paid to the lender. This can be a significant cost of short selling if a stock pays a high dividend yield. Brokers should notify the borrower of a security of the possibility that they may need to make a manufactured payment. They may even reduce the borrower's cash position in your account to cover the payment.

Tax Rules Around Manufactured Payments

If a trader sells a stock short, they will have to remit payments to the lender in lieu of the dividends if the trader holds the short sale open at least 46 days. If a trader closes the short sale by the 45th day after the date of the short sale, they can't deduct the manufactured payment on their taxes. Instead, they must increase the cost basis of the stock used to close the short sale by that amount.

To determine how long a short sale is kept open, a trader shouldn't include any period during which they hold, have an option to buy, or are under a contractual obligation to buy identical stock or securities. They also shouldn't include any period during which they are considered to have diminished their risk of loss from the short sale by reason of holding one or more other positions in substantially similar or related properties.

Manufactured payments should be treated as investment interest expenses, subject to all of the rules and regulations involving investment interest expense. Report these expenses on Schedule A of a tax return. If a trader doesn't itemize their deductions, investment interest expense won't be tax-effective. If a trader doesn't take the deduction because they don't itemize deductions, the deduction is lost forever. There are no "elections" that you can make in order to use the investment interest deduction to reduce any gain (or increase the loss) when you eventually close your short position.

RELATED TERMS
  1. Past Due

    Past due is a loan payment that has not been made as of its due ...
  2. Lender

    A lender makes funds available with the expectation that the ...
  3. Modified Tenure Payment Plan

    A modified tenure payment plan is a way to receive reverse mortgage ...
  4. Silent Second Mortgage

    A silent second mortgage is a second mortgage placed on an asset ...
  5. Security Interest

    Security interest is a legal claim on collateral that has been ...
  6. Tenure Payment Plan

    A tenure payment plan allows a homeowner to receive reverse mortgage ...
Related Articles
  1. Personal Finance

    Purchasing a Home with Bad Credit Is Possible: Here's How

    A bad credit report can become an obstacle, resulting in denials for credit or higher interest rates, but borrowers with low credit scores can still purchase a home.
  2. Investing

    The Top 5 Dividend Paying Oil Stocks for 2016

    Discover the top five dividend-paying oil companies for 2016 and what factors contribute to their ability to continue dividend payments.
  3. Investing

    What are Fixed-Income Securities?

    For a fixed-income security, the periodic return on the investment is the same throughout the life of the security. Principal is returned at the time of maturity. The payment can be in the form ...
  4. Personal Finance

    Trended Credit Data Could Increase Interest Rates for Borrowers (FNMA, EFX)

    Mortgage lenders will soon be required to use trended credit data to qualify borrowers. As a result, many borrowers could have to take higher interest rates.
  5. IPF - Mortgage

    How Much Money Do I Need to Put Down on a Mortgage?

    When you buy a home, one of the biggest up-front expenses is the down payment.
  6. Small Business

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  7. Personal Finance

    Is Making Biweekly Mortgage Payments A Good Idea?

    Do you think making two payments a month for your mortgage is a good idea? Think twice about that. We tell you why.
  8. Tech

    Is the Payment Processing Industry Evolving? (PYPL, TGT)

    Learn about the many changes in commerce and payment systems that are happening in the rapidly evolving payment processing industry.
  9. Investing

    The Best Dividend Paying Stocks in Energy

    Investors need to look beyond dividend yield to find stocks that will help generate a stable dividend income.
RELATED FAQS
  1. Does inflation favor lenders or borrowers?

    Find out under what circumstances inflation benefits borrowers more than lenders and in which situations inflation can be ... Read Answer >>
  2. What is PMI, and does everyone need to pay it?

    No – PMI is only required of those who can't make a 20% down payment on the home they're purchasing. Read Answer >>
  3. If an investor is short a dividend-paying stock on record date are they entitled ...

    Learn what short sellers must do when they are short a dividend-paying stock on record date. Read Answer >>
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center