Debt Workouts Have Tax Implications
In the December issue of Exchange, Ron Maiorano and Keno Chan of KPMG raise an important point: Although restructuring debt is a viable — even critical — option, companies who do may face unexpected tax consequences.
For example, if a debtor and creditor negotiate a change in the terms of a $100 loan agreement, such as an increase to the interest rate, because the debtor has defaulted on the existing obligation the interest rate increase is treated as a significant modification to the debt obligation resulting in an issue price of $95 for the modified debt instrument. The debtor will realize $5 of COD income for tax purposes because the debtor is deemed to have repaid the old $100 loan with proceeds of $95.
Read more in Exchange.
Tags: debt management, Keno Chan, Ron Maiorano, tax
