Bad debts and guarantee repayments: rules for deductibility similar, but not the same

Article Abstract:

Section 166 of the Internal Revenue Code allows a debt that becomes worthless during the tax year to be deductible when taxpayers prove the debt exists, that it is worthless, and that it became worthless in that tax year. These issues are often a point of contention between the U.S. Internal Revenue Service and taxpayers as the veracity of the claims is tested. The bad-debt deduction can be claimed in two ways: the specific write-off and the bad debt reserve, the former for a debt that goes bad in the tax year, and the latter to claim a deduction for a reasonable addition to a bad debt reserve. Calculating the deduction, different types of bad debts, and guarantors of bad debts are described.

Tax administration and procedure, Tax administration, Debt, Income tax

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Continuing expansion of the limits on interest deductions can be avoided

Article Abstract:

Section 163(a) of the Internal Revenue Code allows tax deductions equal to the amounts of interest paid or accrued on indebtedness. Rules regarding such deductions and the specifics of interest deductions that have been (and will be) disallowed are discussed. Tax rules are analyzed for construction period interest, debt-financed stock purchases, interest on life insurance policies, interest related to tax-exempt income, and market discount bonds and short-term instruments. Also explained are the possible changes to these regulations that could be introduced by the passage of Tax Reform Act of 1985.

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When will tax-exempts bar interest deductible on loans?

Article Abstract:

The consequences of borrowing funds while holding or acquiring tax-exempt bonds were shown by two recent cases: Barenholtz, 86-1 USTC paragraph 9328, 57 AFTR2d 86-824 (CA-F.C., 1986), and Earl Drown Corp., 86 TC No. 15. The role of Section 265(2) in preventing taxpayers from enjoying a double tax benefit by deducting interest on loans while using the proceeds to earn tax-exempt interest income, whether directly or indirectly, are described, and the ramifications of the two cases are discussed.

Tax exemption, Tax exemptions, United States. Internal Revenue Service

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