Handling the OID and Below Market Loan Rules (Currently Unavailable)

Author: Jennifer Kowal

The Original Issue Discount rules often result in the recognition of income without associated cash, typically an unwelcome tax situation. The OID rules override a taxpayer's normal method of accounting, requiring interest to be allocated over the life of a loan, regardless of when it is actually paid. In this course, participants will learn how to tell if a debt instrument has original issue discount, as well as the rules for allocating OID to different accrual periods. It will also explain how the OID rules apply to sales of property in exchange for a note, in which part of the purchase price may be reclassified as interest, converting what would be capital gain to the seller to ordinary income. Finally, Ms. Kowal will cover the below market loan rules, which impute interest on below market loans between related parties.

Publication Date: February 2019

Designed For
Tax practitioners at all levels who provide advice and return preparation involving debt instruments.

Topics Covered

• OID Rules- Why Do They Matter?
• Original Issue Discount
• What are OID rules trying to do?
• OID Mechanics
• OID- What Is a Debt Instrument?
• Exceptions to OID Rules
• Determining amount of OID
• Stated Redemption Price at Maturity
• Qualified Stated Interest
• Interest holiday example
• Issue Price
• OID "De Minimis" Rule
• Allocating the OID to each period (holder treatment)
• Allocating the OID to each period (issuer treatment)
• Calculating daily portion of OID
• Why the economic accrual method?
• OID Rules: Consistent Treatment
• Economic Accrual Method
• OID Calculation Example
• Determining Issue Price
• Adequate Stated Interest
• Below Market Loans
• §7872 Exceptions & Consequences
• Consequence: deemed transfers

Learning Objectives

• Identify how to tell if a debt instrument has original issue discount, as well as the rules for allocating OID to different accrual periods
• Recognize how the OID rules apply to sales of property in exchange for a note, in which part of the purchase price may be reclassified as interest, converting what would be capital gain to the seller to ordinary income
• Describe which debt instruments have original issue discount and calculate the total amount of OID
• Identify how to allocate original issue discount among tax periods
• Determine when the original issue discount rules apply to sales of property in exchange for debt instruments
• Recognize and apply the below market loan rules to certain loans between related parties
• Describe OID amount

Level
Intermediate

Instructional Method
Self-Study

NASBA Field of Study
Taxes (2 hours)

Program Prerequisites
Basic familiarity with debt instruments.

Advance Preparation
None