The year 2023 has witnessed a remarkable upsurge in bankruptcy filings, indicating a concerning trend. January and February alone recorded substantial increases of 19% and 18%, respectively, compared to the same months in the previous year. This persistent rise in bankruptcy filings reflects the growing economic difficulties faced by households and businesses. Experts attribute this trend to inflation and supply chain disruptions, which are expected to persist and contribute to the continued increase in bankruptcy filings.

During times of economic uncertainty, tax professionals often receive numerous inquiries regarding the consequences of debt workouts and restructurings, particularly with regards to cancellation-of-debt (COD) income. The occurrence of COD income hinges on various circumstances, including debt modification, equity issuance, discounted debt acquisition, satisfaction of debt through contingent value rights, discharge of debt within or outside bankruptcy, and asset foreclosure.

By default, COD income is generally taxable under Section 61 of the Internal Revenue Code (IRC), unless explicitly excluded under tax law. Fortunately, Section 108 of the IRC provides certain cases where COD income may be partially or entirely excluded from taxation. This article will delve into two exclusions available for COD income: the bankruptcy exclusion and the insolvency exclusion.

Under the bankruptcy exclusion, COD income resulting from the discharge of debt in a bankruptcy proceeding can be excluded from taxable income. This exclusion serves as a relief for individuals and businesses that have sought bankruptcy protection to alleviate their financial burdens. However, it is important to note that this exclusion does not apply to COD income arising from debt modifications or other circumstances unrelated to the discharge in bankruptcy.

The insolvency exclusion provides another avenue for excluding COD income from taxation. This exclusion applies to taxpayers who are insolvent immediately before the discharge of debt. Insolvency refers to a situation where an individual or business's total liabilities exceed the fair market value of their assets. In such cases, the amount of COD income that can be excluded is limited to the extent of insolvency. For a partnership, the insolvency is determined at the partner level and the exclusion is made at the partner level rather than the partnership level.

The exclusion of COD income under the bankruptcy or insolvency exclusion is generally a timing item, essentially deferring recognition of the income through a reduction in the taxpayer’s tax attributes (see Secs. 108(b) and 1017), including net operating losses, general business credit, capital loss carryovers, basis in property, foreign tax credit carryovers, etc.

As the surge in bankruptcy filings continues in 2023, individuals and businesses facing financial challenges should be aware of the tax implications of debt workouts and restructurings. While COD income is generally taxable, certain exclusions under Section 108 of the IRC offer relief for those undergoing bankruptcy or insolvency. Understanding these exclusions can help individuals and businesses mitigate their tax burdens during times of economic uncertainty and financial distress.

현재 글로벌 경제 침체와 공급망의 불안정성으로 인해 많은 기업들은 매출과 수익성의 하락을 겪고 있으며 물가 상승의 영향으로 상황이 악화되고 있다. 이러한 불확실한 시기에 사업을 운영하는 것은 틀림없이 어려운 일이며, 경제 전문가들은 상황이 더욱 악화될 가능성이 있다고 말하고 있다. 이러한 어려움을 극복하기 위해서는 기업들은 세무 관리를 최적화하는 것을 비롯한 비용을 최소화하는 전략을 적극적으로 모색해야 한다.

Interest Charge-Domestic International Sales Corporation (IC-DISC) 는 IRC section 992에 따라 제공되는 세제 혜택으로 국제 판매에 관여하는 특정 유형의 기업에 혜택을 제공할 수 있다. IC-DISC의 주요 목적은 미국 기업이 수출 상품을 수출하거나 특정 수출 관련 서비스를 제공하는 경우 세제적 이점을 제공하는 것이다.

IC-DISC 세제 혜택을 받기 위해서는 해당 기업은 미국에서 제조, 생산, 재배, 추출된 상품을 수출해야 한다. 이는 직접 또는 간접적으로 수출하는 기업뿐만 아니라 수출 관련 서비스를 제공하는 기업도 포함된다.

자격을 갖춘 기업은 별도의 IC-DISC 법인을 설립해야 하며, IC-DISC 수수료를 지불하여 수출 관련 수입의 일부를 할당할 수 있다. 이 수수료는 적격 수출 판매액의 4%와 수출 상품 판매에 대한 과세 소득의 50% 중에서 더 높은 금액으로 결정된다. 적절한 절차를 통해 설립된 IC-DISC 법인은 연방 소득세에서 면세 혜택을 받을 수 있다.

예시:

미국에서 위젯을 제조하고 모든 위젯을 캐나다로 수출하는 C-corporation인 Company X를 예로 들어보겠다. 2022년에 Company X는 총 매출 $100M와 과세 소득 $5M를 기록했다. IC-DISC 구조를 도입함으로써 Company X는 IC-DISC 법인에게 $4M의 수수료 (적격 수출 판매액의 4% 또는 적격 과세 소득의 50% 중에서 더 높은 금액) 를 지급할 수 있다. 이 결과, Company X는 $1M의 과세 소득을 신고하게 되며, IC-DISC 법인은 연방 소득세에서 면세 대상 법인이므로 세금이 부과되지 않는다. IC-DISC 구조를 도입함으로써 Company X는 연방 소득세 $840,000를 절약할 수 있다.

IC-DISC의 자격 요건과 혜택은 복잡하며 특정한 상황에 따라 달라질 수 있다. IC-DISC를 활용하기에 적합한 기업인지 판단하기 위해서는 국제 세무 경험을 갖춘 숙련된 세무 컨설턴트와 상의하는 것이 중요하다.

IC-DISC가 제공하는 세제 혜택을 활용함으로써 수출에 종사하는 기업들은 이 어려운 시기에 세무 관리를 최적화하고 재무 성과를 향상시킬 수 있다.

The current global economic downturn and the volatility of supply chains have led many businesses to face declining sales and profitability, exacerbated by the impact of inflation. Running a business during these uncertain times is undoubtedly challenging, and economic experts suggest that the situation may further deteriorate. In order to navigate these difficulties, businesses must actively seek strategies to minimize costs, including optimizing their tax management.

The Interest Charge-Domestic International Sales Corporation (IC-DISC) is a tax incentive provided under IRC section 992 that can benefit certain types of businesses involved in international sales. The primary purpose of an IC-DISC is to provide a tax advantage to U.S. companies that export goods or provide certain export-related services.

To qualify for the IC-DISC tax benefit, the business must be involved in exporting goods that are manufactured, produced, grown, or extracted in the United States.  This includes companies engaged in direct or indirect exporting, as well those offering export-related services.

A qualified business must establish a separate entity, the IC-DISC, to which it can allocate a portion of their export-related income by paying IC-DISC commission.  The commission is determined as the higher of 4% of qualified export gross receipts or 50% on the taxable income from sale of export property.  A properly structured IC-DICS entity is tax-exempt for federal income tax purposes.

Illustration:

Let’s consider the example of Company X, a C-corporation that manufactures widgets in the United States and exports all of its widgets to Canada.  In 2022, Company X records $100M of gross revenue and $5M of taxable income.  By implementing an IC-DISC structure, Company can pay $4M of commission (greater of 4% of qualifying export sale or 50% of qualifying taxable income) to the IC-DISC entity.  As a result, Company X reports $1M of taxable income, while the IC-DISC remains tax-exempt for federal income tax purposes. and the IC-DISC is subject to zero tax, as it is a tax-exempt entity for federal income tax purpose.  By implementing the IC-DISC structure, Company X saves $840,000 in federal taxes.

The eligibility and benefits of an IC-DISC can be complex and highly dependent on specific circumstances.  It is crucial to consult with a qualified tax advisor experienced in international tax matters to determine if your business is an ideal candidate for utilizing an IC-DISC.

By leveraging the potential tax advances offered by an IC-DISC, businesses engaged in exporting can optimize their tax positions and enhance their financial performance during these challenging times.

Under current GAAP, in general, crypto assets are accounted for as indefinite-lived intangibles assets.  These assets are initially recorded at cost and subject to impairment testing, and upward adjustment is prohibited.   In other words, if the price of the cryptocurrency goes up or if a cryptocurrency that was previously written-down subsequently recovers, it cannot be written up.

FASB believes that the current accounting treatment of crypto assets does not provide investors, lenders, creditors and users of financial statements with decision-useful information (the underlying economics of these assets and an entity’s financial position).  In order to address these concerns, the Board has issued the proposed Update to improve the accounting for and disclosure of certain crypto assets.

Under the proposed Update, when adopted, would require that an entity measure certain crypto assets at fair market value in the balance sheet and recognize changes in fair value in net income.  The proposed Update also would require that an entity provide enhanced disclosures for both annual and interim reporting periods.  The proposed Update would require a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the annual reporting period in which an entity adopts the proposed Update.  The Board will determine the effective date after it considers stakeholders’ feedback on the proposed Update.

Link to FASB’s Exposure Draft Proposed Accounting Standards Update—Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Asset (fasb.org)