diff --git a/compiler/frontend/src/org/jetbrains/kotlin/resolve/AnnotationChecker.kt b/compiler/frontend/src/org/jetbrains/kotlin/resolve/AnnotationChecker.kt
index 8a396c1c0ef..a5fb526aad9 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/resolve/AnnotationChecker.kt
+++ b/compiler/frontend/src/org/jetbrains/kotlin/resolve/AnnotationChecker.kt
@@ -54,7 +54,7 @@ public class AnnotationChecker(private val additionalCheckers: Iterable<Addition
     }
 
     public fun checkExpression(expression: JetExpression, trace: BindingTrace) {
-        checkEntries(expression.getAnnotationEntries(), TargetLists.T_EXPRESSION, trace)
+        checkEntries(expression.getAnnotationEntries(), getActualTargetList(expression, null), trace)
         if (expression is JetFunctionLiteralExpression) {
             for (parameter in expression.valueParameters) {
                 parameter.typeReference?.let { check(it, trace) }
@@ -172,6 +172,8 @@ public class AnnotationChecker(private val additionalCheckers: Iterable<Addition
                     if (annotated.projectionKind == JetProjectionKind.STAR) TargetLists.T_STAR_PROJECTION else TargetLists.T_TYPE_PROJECTION
                 is JetClassInitializer -> TargetLists.T_INITIALIZER
                 is JetMultiDeclaration -> TargetLists.T_MULTI_DECLARATION
+                is JetFunctionLiteralExpression -> TargetLists.T_FUNCTION_LITERAL
+                is JetExpression -> TargetLists.T_EXPRESSION
                 else -> TargetLists.EMPTY
             }
         }
@@ -225,6 +227,8 @@ public class AnnotationChecker(private val additionalCheckers: Iterable<Addition
 
             val T_EXPRESSION = targetList(EXPRESSION)
 
+            val T_FUNCTION_LITERAL = targetList(FUNCTION_LITERAL, FUNCTION, EXPRESSION)
+
             val T_TYPE_REFERENCE = targetList(TYPE) {
                 onlyWithUseSiteTarget(VALUE_PARAMETER)
             }
diff --git a/compiler/testData/diagnostics/tests/annotations/options/functions.kt b/compiler/testData/diagnostics/tests/annotations/options/functions.kt
new file mode 100644
index 00000000000..082fd9fb760
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/annotations/options/functions.kt
@@ -0,0 +1,16 @@
+@Target(AnnotationTarget.FUNCTION)
+annotation class FunAnn
+
+fun bar(arg: () -> Int) = arg()
+
+@FunAnn fun gav() = 13
+
+fun foo(arg: Int) {
+    // Literal is annotatable
+    bar @FunAnn { arg }
+    // Function expression too
+    val f = @FunAnn fun(): Int { return 42 }
+    // But here, f and gav should be annotated instead
+    bar(<!WRONG_ANNOTATION_TARGET!>@FunAnn<!> f)
+    bar(<!WRONG_ANNOTATION_TARGET!>@FunAnn<!> ::gav)
+}
\ No newline at end of file
diff --git a/compiler/testData/diagnostics/tests/annotations/options/functions.txt b/compiler/testData/diagnostics/tests/annotations/options/functions.txt
new file mode 100644
index 00000000000..82735a9a431
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/annotations/options/functions.txt
@@ -0,0 +1,12 @@
+package
+
+public fun bar(/*0*/ arg: () -> kotlin.Int): kotlin.Int
+public fun foo(/*0*/ arg: kotlin.Int): kotlin.Unit
+@FunAnn() public fun gav(): kotlin.Int
+
+@kotlin.annotation.Target(allowedTargets = {AnnotationTarget.FUNCTION}) @kotlin.annotation.annotation() public final class FunAnn : kotlin.Annotation {
+    public constructor FunAnn()
+    public open override /*1*/ /*fake_override*/ fun equals(/*0*/ other: kotlin.Any?): kotlin.Boolean
+    public open override /*1*/ /*fake_override*/ fun hashCode(): kotlin.Int
+    public open override /*1*/ /*fake_override*/ fun toString(): kotlin.String
+}
diff --git a/compiler/testData/diagnostics/tests/annotations/options/targets/expr.kt b/compiler/testData/diagnostics/tests/annotations/options/targets/expr.kt
index 156e175b619..3a55789d3b0 100644
--- a/compiler/testData/diagnostics/tests/annotations/options/targets/expr.kt
+++ b/compiler/testData/diagnostics/tests/annotations/options/targets/expr.kt
@@ -7,5 +7,5 @@ fun transform(i: Int, tr: (Int) -> Int): Int = <!WRONG_ANNOTATION_TARGET!>@base<
 @base <!WRONG_ANNOTATION_TARGET!>@special<!> fun foo(i: Int): Int {
     val j = <!WRONG_ANNOTATION_TARGET!>@base<!> @special i + 1
     if (j == 1) return foo(@special <!WRONG_ANNOTATION_TARGET!>@base<!> 42)
-    return transform(@special j, <!WRONG_ANNOTATION_TARGET!>@base<!> @special { @special it * 2 })
+    return transform(@special j, @base @special { @special it * 2 })
 }
diff --git a/compiler/tests/org/jetbrains/kotlin/checkers/JetDiagnosticsTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/checkers/JetDiagnosticsTestGenerated.java
index f859dc0cd82..660022d82b8 100644
--- a/compiler/tests/org/jetbrains/kotlin/checkers/JetDiagnosticsTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/checkers/JetDiagnosticsTestGenerated.java
@@ -1034,6 +1034,12 @@ public class JetDiagnosticsTestGenerated extends AbstractJetDiagnosticsTest {
                     doTest(fileName);
                 }
 
+                @TestMetadata("functions.kt")
+                public void testFunctions() throws Exception {
+                    String fileName = JetTestUtils.navigationMetadata("compiler/testData/diagnostics/tests/annotations/options/functions.kt");
+                    doTest(fileName);
+                }
+
                 @TestMetadata("javaDocumented.kt")
                 public void testJavaDocumented() throws Exception {
                     String fileName = JetTestUtils.navigationMetadata("compiler/testData/diagnostics/tests/annotations/options/javaDocumented.kt");
diff --git a/core/descriptors/src/org/jetbrains/kotlin/descriptors/annotations/KotlinTarget.kt b/core/descriptors/src/org/jetbrains/kotlin/descriptors/annotations/KotlinTarget.kt
index cab41a1465f..bfc25e5015f 100644
--- a/core/descriptors/src/org/jetbrains/kotlin/descriptors/annotations/KotlinTarget.kt
+++ b/core/descriptors/src/org/jetbrains/kotlin/descriptors/annotations/KotlinTarget.kt
@@ -32,11 +32,11 @@ public enum class KotlinTarget(val description: String, val isDefault: Boolean =
     LOCAL_VARIABLE("local variable"),
     VALUE_PARAMETER("value parameter"),
     CONSTRUCTOR("constructor"),
-    FUNCTION("function"),                      // includes *_FUNCTION
+    FUNCTION("function"),                      // includes *_FUNCTION and FUNCTION_LITERAL
     PROPERTY_GETTER("getter"),
     PROPERTY_SETTER("setter"),
     TYPE("type usage", false),
-    EXPRESSION("expression", false),
+    EXPRESSION("expression", false),           // includes FUNCTION_LITERAL
     FILE("file", false),
 
     TYPE_PROJECTION("type projection", false),
@@ -60,7 +60,8 @@ public enum class KotlinTarget(val description: String, val isDefault: Boolean =
     TOP_LEVEL_PROPERTY("top level property", false),
 
     INITIALIZER("initializer", false),
-    MULTI_DECLARATION("multi declaration", false)
+    MULTI_DECLARATION("multi declaration", false),
+    FUNCTION_LITERAL("function literal", false)
     ;
 
     companion object {