Dealing with Debt and Interest 2023 - 18.5 CPE

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Dealing with Debt & Interest
Course Description & Study Guide
This course brings the practitioner up-to-date information on tax issues affecting interest and debt. It covers the definition of bona fide debt, the avoidance of eq-uity and lease treatment, imputed interest rates, and debt modification. The var-ious types of interest and their required allocation are explored and reviewed. For the economically troubled client, special attention is devoted to debt cancel-lation, repossession, discounts, and foreclosure. The program also discusses in-stallment sales, equity participation debt, taxable interest, and bad debts.
Completion Deadline & Exam: This course, including the examination, must be completed within one year of the date of purchase. In addition, unless otherwise indicated, no correct or incorrect feedback for any exam question will be provid-ed.
Course Level: Overview. This program is appropriate for professionals at all or-ganizational levels.
Field of Study: Taxes
Prerequisite: General understanding of federal income taxation.
Advanced Preparation: None
Learning Assignments & Objectives
As a result of studying each assignment, you should be able to meet the objec-tives listed below each assignment.
ASSIGNMENT SUBJECT
Chapter 1 Deductible Interest & Debt
At the start of Chapter 1, participants should identify the following topics for study:
* Indebtedness
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* Deductible interest & mortgage interest
* Investment interest
* Nondeductible interest
* Personal interest & capitalized interest
* At-risk rules
* Passive activity limitations
* Below-market interest rate loans
* Imputed interest on sales
* Original issue discount (OID)
Learning Objectives
After reading Chapter 1, participants will be able to:
1. Determine “interest” and select how much is tax deductible under §163 by:
a. Identifying what constitutes bona fide debt considering economic substance and purpose and specifying how transactions with family members and controlled corporations can recharacterize alleged in-debtedness into gift or business equity and the factors used in this recharacterization; and
b. Specify the incentives to use corporate debt instead of equity, rec-ognizing the special treatment of failed equity investment under §1244, and determining the differences among debt from installment sales, long-term and leveraged leases, and annuities.
2. Identify deductible interest, special calculation concepts, and proce-dures by:
a. Recognizing the allocation of interest based on the debt’s purpose, the application of any carryover rules, and determining net invest-ment income and its relationship to the investment interest deduc-tion; and
b. Identifying the special tax treatment given to student loans, mar-gin accounts, and market discount bonds specifying what happens to any disallowed interest expense and the timing considerations in in-terest reporting including interest paid in advance.
3. Identify nondeductible interest and the provisions that deny or re-strict the deduction of interest by:
a. Recognizing when interest is nondeductible personal interest un-der §163(h)(1) and identifying the disallowance of interest related to tax-exempt income under §265, the life insurance interest re-strictions of §264; the §465 at-risk limitations, and the application of the §469 passive loss rules; and
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b. Specifying the treatment of commitment fees and service charges based on R.R. 67-2897 and case law.
4. Recognize the deduction of interest using either the cash method or accrual method, and determine the special elections applicable to and treatment of carrying charges under §266, below-market loans, imput-ed interest, and original issue discount.
After studying the materials in Chapter 1, answer exam questions 1 to 25.
ASSIGNMENT SUBJECT
Chapter 2 Allocation of Deductible Interest
At the start of Chapter 2, participants should identify the following topics for study:
* Allocation period
* Proceeds not disbursed to borrower
* Proceeds deposited in borrower’s account
* Accrued interest
* Loan proceeds received in cash
* Loan repayments
* Continuous borrowings
* Loan refinancing
* Debt-financed acquisitions
* Debt-financed distributions
Learning Objectives
After reading Chapter 2, participants will be able to:
1. Determine the allocation of deductible interest based on the use and repayment of the loan proceeds and identify the special rules for the allocation of interest expense in connection with debt-financed acquisi-tions of, and distributions from, partnerships and S corporations.
After studying the materials in Chapter 2, answer exam questions 26 to 30.
ASSIGNMENT SUBJECT
Chapter 3 Home Mortgage Interest
At the start of Chapter 3, participants should identify the following topics for study:
* Secured debt
* Qualified home
* Special situations
* Points
* Mortgage interest statement - Form 1098
* Special rule for cooperative housing
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* Home acquisition debt modifications
* Former home equity debt
* Mixed-use mortgages
* Grandfathered debt
Learning Objectives
After reading Chapter 3, participants will be able to:
1. Identify categories of mortgages and characteristics of secured debt that influence the deductibility of interest, “qualified home,” and spe-cial situations affecting mortgage interest.
2. Specify special situations that can impact the qualified home mort-gage interest deduction.
3. Recognize the general rule for the tax treatment of points and their exceptions, determine when a taxpayer will receive a Mortgage Interest Statement – Form 1098 and which information is included on this statement to figure interest deductions.
4. Identify when a stock in a cooperative housing corporation owned by a tenant-stockholder is a qualified home allowing for a deduction of in-terest paid, and specify the limits on the home mortgage deduction to ensure that appropriate deductions are taken.
After studying the materials in Chapter 3, answer exam questions 31 to 42.
ASSIGNMENT SUBJECT
Chapter 4 Taxable Interest
At the start of Chapter 4, participants should identify the following topics for study:
* Dividends v. interest
* CDs & deferred interest accounts
* U.S. obligations
* Miscellaneous interest items
* U.S. savings bonds
* Education Savings Bond Program
* Bonds sold between interest dates
* Insurance
* Taxable interest on state or local government obligations
* Tax-exempt bonds bought at a discount
Learning Objectives
After reading Chapter 4, participants will be able to:
1. Identify distinctions between dividends and interest, the taxability of interest on CDs, deferred interest accounts, frozen deposits, and U.S.
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obligations, and specify the treatment of other miscellaneous interest items.
2. Recognize the types of U.S. savings bonds and their tax advantages and disadvantages, identify the tax treatment of bonds sold between in-terest dates, and determine when life insurance proceeds are taxable or excludable from income.
3. Identify state and local government debt obligations, the nature of the activity they fund, and their impact on whether the interest re-ceived from them is taxable.
After studying the materials in Chapter 4, answer exam questions 43 to 51.
ASSIGNMENT SUBJECT
Chapter 5 Installment Sales
At the start of Chapter 5, participants should identify the following topics for study:
* Installment method
* Installment income
* Imputed interest & OID
* Related party sales
* Like-kind exchanges
* Contingent payments or price
* Sale of a business
* Dealer dispositions
* Installment notes in excess of $5 million
* Dispositions of installment obligations
Learning Objectives
After reading Chapter 5, participants will be able to:
1. Recognize the importance of the installment method and, specify the §453 requirements and basic terminology associated with using the installment method.
2. Determine the impact of §483 (imputed interest rules) and §§1271 through 1274 (original issue discount rules) on installment sales, and identify the §1038 repossession rules that apply to repossessions by sellers and repossessions of principal residences.
3. Specify the rules associated with real property sales and casual sales of personal property, the provisions associated with the related party rules of §453 and the exceptions that override basic installment plan-ning, identify regulations governing like-kind exchanges and their im-
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pact on delayed exchanges, and recognize the development and appli-cation the contingent payment rules.
4. Determine the allocation of payments for a single sale of several as-sets among different classes according to R.R. 76-110, identify the §1060 residual method to report the sale of a business, and identify “dealer dispositions” and when installment reporting may not be used.
5. Recognize the interest payable on installment dispositions exceeding $5 million and specify the circumstances when dispositions of install-ment obligations occur.
After studying the materials in Chapter 5, answer exam questions 52 to 70.
ASSIGNMENT SUBJECT
Chapter 6 Repossession
At the start of Chapter 6, participants should identify the following topics for study:
* Repossession of personal property
* Non-installment method sales
* Installment method sales
* Basis of repossessed personal property
* Bad debt
* Repossession of real property
* Figuring gain on repossession
* Seller’s former home exception
Learning Objectives
After reading Chapter 6, participants will be able to:
1. Identify the variables that determine which §1038 rules for reposses-sions apply, and determine basis and gain or loss resulting from repos-session of personal property using the installment method and the non-installment method sales.
2. Specify the distinctions between the rules, calculations, and effects of repossessions of personal and real property, and identify when a §166 bad debt deduction may be taken if the seller repossesses real property.
After studying the materials in Chapter 6, answer exam questions 71 to 78.
ASSIGNMENT SUBJECT
Chapter 7 Debt Cancellation & Foreclosure
At the start of Chapter 7, participants should identify the following topics for study:
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* Income inclusion rule & exceptions
* Real property business debt exclusion
* General ordering of tax attribute reduction
* Basis reduction
* Individual and partnership bankruptcies
* Corporate stock-for-debt rule
* S corporation bankruptcy
* Reporting
* Amount realized on sale or other distribution of property
* Discounted acquisition of debt
Learning Objectives
After reading Chapter 7, participants will be able to:
1. Recognize the effect that debt cancellation has on net worth and po-tential income inclusion from cancellation of indebtedness income, and specify exceptions to the general income inclusion rule and their tax impact.
2. Identify tax attribute reductions and their application when reducing canceled debt, cite the special basis reduction rules, recognize the de-preciable property election in reducing the basis of depreciable proper-ty before reducing any other tax attributes, determine what constitutes individual, partnership, and S corporation bankruptcy, and specify the variables used in determining whether shares of stock issued to a credi-tor are nominal or token.
3. Determine gain or loss resulting from foreclosure or repossession and their reporting and filing requirements, specify the timing and character of the gain or loss, and cite the hidden income tax danger of directly or indirectly acquiring one's own debt at a discount.
After studying the materials in Chapter 7, answer exam questions 79 to 89.
ASSIGNMENT SUBJECT
Chapter 8 Equity Participation Debt
At the start of Chapter 8, participants should identify the following topics for study:
* Shared appreciation mortgages - SAMs
* Types of equity participation debt
* Contingent interest as the measure & means of equity participation
* Basic tests to establish interest
* Partnership recharacterization - Culbertson Rule
* Tax consequences of debt recharacterization
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* The “true” option rule
* Convertible indebtedness
* Imputed interest & original issue discount
* Accounting treatment
Learning Objectives
After reading Chapter 8, participants will be able to:
1. Recognize the mechanics of equity participation debt and the value of this financing option to clients by:
a. Identifying equity participation loans, the lender’s role in each and common elements and characteristics of shared appreciation loans along with key terms; and
b. Specify the economic aspects of shared appreciation mortgages including the tax treatment of shared appreciation mortgages based on the hybrid concept and R.R. 83-51.
2. Determine the types of equity participation debt by:
a. Specifying the basic tests for loans where “interest” is measured in whole or in part by equity participation, the importance of the Cul-bertson rule, and the risk of partnership status;
b. Identifying the tax consequences of being a property owner and the recharacterization of debt based on the failure to find a debtor-creditor relationship between the borrower and lender; and
c. Specifying the conversion and option rights associated with equity participation debt, the application to debt instruments of the time value of money provisions of imputed interest, and original issue dis-count.
After studying the materials in Chapter 8, answer the exam questions 90 to 100.
ASSIGNMENT SUBJECT
Chapter 9 Foreign Interest Withholding
At the start of Chapter 9, participants should identify the following topics for study:
* Fixed or determinable annual or periodic income
* Interest paid by U.S. obligors & interest paid to controlling foreign corporations
* Interest on real property mortgages
* Interest paid by foreign corporations
* Interest on tax-free covenant bonds
* Interest on deposits
* Payer having income from abroad
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* Bankers’ acceptances
* Sales of bonds between interest dates
* Portfolio interest
Learning Objectives
After reading Chapter 9, participants will be able to:
1. Recognize the general tax treatment of interest received from sources within the United States, and identify the tax treatment of for-eign interest by:
a. Specifying types of interest paid to foreign payees that are subject to withholding and how to figure the tax;
b. Identifying the requirements of tax treaties to ensure entitlement to benefits under the tax treaty and specifying statutory withholding rates for tax-free covenant bond interest; and
c. Determining the types of interest of U.S. obligors that are not sub-ject to withholding and the conditions of their exemption.
After studying the materials in Chapter 9, answer exam questions 101 to 105.
ASSIGNMENT SUBJECT
Chapter 10 Bad Debts
At the start of Chapter 10, participants should identify the following top-ics for study:
* Totally worthless bad debts
* True debt
* Mechanics’ liens
* Reporting & recovery
* Credit transactions
* Former business bad debts
* Insolvency of a partner
* Business loan guarantees
* Specific charge-off method
* Nonaccrual-experience accounting method
Learning Objectives
After reading Chapter 10, participants will be able to:
1. Identify bad debt categories and their tax treatment and effect on accounting and reporting by:
a. Determining the concepts of worthlessness and true debt includ-ing the unique characteristics of deductible nonbusiness bad debt;
b. Recognizing the treatment of bad debts related to political debts, mechanics’ liens, and secondary liabilities on home mortgages; and
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c. Specifying the forms used to report bad debts and the tax treat-ment of recovered amounts.
2. Determine the §166 tax treatment of business bad debts by:
a. Identifying the tax treatment of business credit transactions, loan guarantees, accounts receivable or notes receivable particularly the tax treatment of accounts receivable in a business sale, and specify-ing the various forms on which a bad debt deduction should be taken depending on the entity type;
b. Recognizing the tests that must be met by an accrual method business taxpayer to be able to take a bad debt deduction for a polit-ical debt and identifying the tax consequences of the insolvency of a partner when a business partnership terminates and debts are owed; and
c. Specifying methods that can be used by businesses to treat uncol-lectible amounts and the rules that apply to each.
After studying the materials in Chapter 10, answer exam questions 106 to 120.
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