The distinction between debt and equity can have important tax consequences. Taxpayers can generally deduct interest payments but corporate distributions to shareholders are not deductible. Taxpayers may be able to deduct bad debts more easily than worthless stock or partnership interests. I.R.C. Section 385 specifies rules for determining whether an interest in a corporation is treated as stock or indebtedness (or as in part stock and in part indebtedness). Factors developed in court cases over the years help make similar determinations for non-corporate taxpayers.
Per the IRS Education Provider Standards this course must be COMPLETED by 12/31/2025 to receive credits. NOTE: Go to My Professional Profile in your CCH CPELink account settings to ensure your name, and PTIN number; matches your PTIN cardPublication Date: April 2023
Topics Covered
- Tax Advantages of Debt over Equity Financing
- Factors to Determine Debt v. Equity
- Impact of I.R.C. Section 385 Rules
- Differences of Debt/Equity Classification for Partnerships
Learning Objectives
- Recognize how to explain tax advantages of debt financing
- Describe common law factors used to determine whether debt exists
- Describe effect of section 385 regulations
- Identify treatment of debt v. equity for partnership and LLC interests
Level
Intermediate
Instructional Method
Self-Study
NASBA Field of Study
Taxes (2 hours)
Program Prerequisites
Basic understanding of debt and/or equity.
Advance Preparation
None
Instructor
Jennifer Kowal
Jennifer Kowal, JD, has been a tax professor and the director of the graduate tax program at Loyola Law School in Los Angeles since 2003. Loyola’s graduate tax program offers an LL.M. in Taxation for attorneys and a Master in Tax Law for non-lawyers. Professor Kowal teaches courses in advanced income taxation, income tax timing issues, corporate taxation, and tax research, among others. Prior to teaching at Loyola, Professor Kowal taught in the International Tax Program at Harvard Law School.
She also practiced law with the firms of Irell & Manella in Los Angeles and Ropes & Gray in Boston, advising clients on the taxation of various business transactions, including cross-border, partnership and corporate structures. Professor Kowal holds a BS in Accounting with distinction from the University of Kansas, and a JD from UCLA School of Law, where she was a member of the Order of the Coif.