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Recession Relief: Rounding Up Recent Tax Developments

In today’s difficult economic environment, managing cash flow and liquidity are keys to survival for many companies. Fortunately, the IRS and lawmakers have provided some assistance in the form of tax breaks. Some recent legislative and regulatory changes may provide your company with relief.

Helping companies restructure debt
With interest rates at record lows, companies restructuring existing debt obligations risk triggering deduction limits for applicable high-yield discount obligations (AHYDO). These limits defer — and in some cases disallow entirely — original issue discount (OID) deductions for corporate debt instruments with a term of more than five years and a yield to maturity that’s at least 5% above the AFR.

To help companies restructure debt without triggering AHYDO deduction limits, the American Recovery and Reinvestment Act of 2009 (ARRA), enactecd on February 17, 2009 temporarily suspends those limits. This relief applies to debt instruments issued between September 1, 2008, and December. 31, 2009 in exchange for existing non-AHYDO debt instruments, so long as the issuer of both debt instruments is the same.

“Exchange” includes modification of an existing debt instrument that’s deemed to be an exchange. For debt instruments issued after 2009, ARRA authorizes the U.S. Treasury Secretary to use a rate higher than the AFR to determine whether AHYDO rules apply. ARRA also provides companies with some relief from cancellation of debt (COD) income. The Secretary also has the authority to extend the suspension for periods after December 31, 2009 if it’s determined that an extension is appropriate in light of distressed conditions in the debt capital markets.

Expanded NOL carrybacks
For companies suffering net operating losses (NOLs), the ability to use those losses to offset income in previous or future years can be a great way to boost cash flow. Ordinarily, a company can carry back NOLs up to two years.  ARRA first expanded the carryback period to five years for losses in tax years beginning or ending in 2008 for small businesses — companies with average annual gross receipts of $15 million or less.

On November 6, 2009, the Worker, Homeownership and Business Assistance Act of 2009 extended the carryback period to up to five years for virtually all businesses (except TARP recipients on NOLs arising from one taxable year that either begins or ends in 2008 or 2009.) If a taxpayer chooses to carryback the loss to the fifth preceding year, the NOL can only offset 50% of taxable income of the fifth preceding year.

Encouraging small public company investment
An enhanced tax break for qualified small business stock may make it easier for small public companies to attract investors. Ordinarily, this tax break allows individual investors to exclude 50% of their capital gains on the sale of original issue stock in a qualifying C corporation held for more than five years. ARRA increases the exclusion to 75% for stock issued after February 17, 2009, and before January 1, 2011.

To qualify, a company must have aggregate capital of $50 million or less immediately before the stock is issued and meet several other requirements.

Keep an eye on Congress
Lawmakers are expected to continue to introduce new tax and financial measures to help companies cope with the troubled economy. By monitoring legislative developments, your company will be better prepared to take advantage of benefits that can boost your cash flow and slash your tax bill.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.