Recent guidance from the IRS clarifies new rules for the deferral of taxes due to cancelled or restructured bad debts. That guidence is available at this link.

The new rules were a part of the American Reinvestment and Recovery Act (the stimulus package passed last February). The provisions, supported by NAHB, allow a tax-free deferral of five years, followed by a 20% pro-rata repayment of the cancelled tax debt over the next five years for debts restructured in 2009 and 2010.

The rule applies to C Corporations and pass-through entities.

While the description of the provision speaks to “reacquisition of the debt” (as may often be the case for certain large companies), the new rules also apply to debt-for-debt exchanges. This deferral should help reduce the tax consequences of businesses seeking debt workouts with lenders. The Revenue Procedure will be published on Sept. 8 in Internal Revenue Bulletin 2009-36.

NAHB members with comments on the rules are asked to e-mail Robert Dietz or Greg Brown. [Return to top]