Tax Analysts provides news, analysis, and commentary on tax-related topics, including debt instrument taxation. Generally, interest associated with debt instruments is taxable as ordinary income for the debt holder and an ordinary deduction for the debt issuer. The holder of debt is often referred to as the creditor; the issuer of debt is referred to as the debtor. Tax Notes covers regulatory and legislative developments in taxable and tax-exempt bonds, including latest regulations, revenue rulings, revenue procedures, letter rulings, chief counsel advice, and legislative developments.
Timing and accounting periods play an important role in the tax treatment of debt instruments because payments under a debt instrument vary depending on the instrument. Some instruments feature an issue price below its face value with no payments until the end of the term. This is called a zero coupon bond, with a payment at the end of the debt’s term. The tax code treats the instrument as having implicit interest that is called original issue discount (OID). OID is generally included in income of the debt holder as it is economically accrued.
Instruments may also lose value on the secondary market to reflect rising interest rates. These instruments are said to have market discount. In an economy with falling rates, debt will trade at above its face amount, creating premium, or acquisition premium if acquired in the secondary market.
There are also several different varieties of debt instruments, including contingent payment debt instruments, variable payment debt instruments, convertible debt instruments, and hybrid debt instruments.
Tax Notes Federal and Tax Notes Today Federal subscribers have free access to James M. Peaslee and David Z. Nirenberg, Federal Income Taxation of Securitization Transactions and Related Topics (Fifth Edition). Chapter 6, Part D.2, discusses debt modifications, chapters 8 and 9 discuss the tax treatment of debt instruments by investors and issuers, and Chapter 12 covers foreign investors in debt instruments, including withholding taxes and the Foreign Account Tax Compliance Act.
