Debt or Equity?
Author: Jennifer Kowal
| CPE Credit: |
2 hours for CPAs
2 hours Federal Tax Related for EAs and OTRPs
2 hours Federal Tax Law for CTEC |
The distinction between debt and equity can have important tax consequences. Taxpayers can generally deduct interest payments but corporate distributions to shareholders are not deductible. Taxpayers may be able to deduct bad debts more easily than worthless stock or partnership interests. I.R.C. Section 385 specifies rules for determining whether an interest in a corporation is treated as stock or indebtedness (or as in part stock and in part indebtedness). Factors developed in court cases over the years help make similar determinations for non-corporate taxpayers.
Publication Date: April 2023
Designed For
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Topics Covered
- Tax Advantages of Debt over Equity Financing
- Factors to Determine Debt v. Equity
- Impact of I.R.C. Section 385 Rules
- Differences of Debt/Equity Classification for Partnerships
Learning Objectives
- Recognize how to explain tax advantages of debt financing
- Describe common law factors used to determine whether debt exists
- Describe effect of section 385 regulations
- Identify treatment of debt v. equity for partnership and LLC interests
Level
Intermediate
Instructional Method
Self-Study
NASBA Field of Study
Taxes (2 hours)
Program Prerequisites
Basic understanding of debt and/or equity.
Advance Preparation
None
