Business downturns tend to be cyclical. When they occur, even sophisticated tax practitioners face pressure to quickly reacquaint themselves with issues they haven’t confronted recently. This blog highlights some of the many potential exposures concerning distressed businesses.
Debt Workouts, Modifications, and Cancellations
Most practitioners are aware that a cancellation of debt generally results in taxable cancellation of indebtedness income (COI), absent bankruptcy or insolvency.1 Moreover, “significant” modifications of debt trigger deemed exchanges that can result in tax consequences to debtors and creditors.2 Broadly speaking, changes in a debt instrument’s legal terms constitutes a modification, and modifications will be considered significant if they – cumulatively with other modifications – have a significant economic impact. Changes in obligor, interest rate, or security are typically significant modifications.
