Legal Alerts/Details

Look Before You Lend: A Practical Discussion of Tax Issues to Consider When Lending to an Emerging Business

December 02, 2019
  1. The manner for calculating a note’s issue price will be different depending on whether the note is issued for cash or property, and further depending on whether the debt or the property for which the debt is issued is publicly traded.  See, Treas. Reg. Secs. 1.1273-2(a), -2(b), -2(c), and -2(d).
  2. The note’s issue price is $100 (i.e., the amount initially paid for the note in cash); there is no qualified stated interest (i.e., adequate stated interest is not required to be paid at least annually); and a total of $40 of interest will accrue over the term of the note and be paid at maturity, meaning that the note’s stated redemption price at maturity is $140 (i.e., $100 principal, plus $40 of accrued interest, all paid at maturity).  In light of the foregoing, the amount of OID for this note is equal to $40, calculated as the excess of the note’s stated redemption price at maturity of $140, over the note’s issue price of $100.
  3. The 8% annual interest is ignored for purposes of calculating OID because, in this example, such interest is required to be, and is, paid at least annually.
  4. Assumes that the interest is subject ordinary income tax rates at the current maximum applicable federal rate of 37%.
  5. Because (i) the interest payments are delayed until maturity, (ii) OID is calculated on a compound basis, and (iii) the interest on the note is calculated on a simple basis, the OID rules essentially create an annual yield that for the note that is less than the note’s stated rate of 8%. 
  6.  Assumes that the interest is subject ordinary income tax rates at the current maximum applicable federal rate of 37%.

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