Considering Cancellation of Debt Income in a Workout
If you like many businesses are going through a workout, turnaround or reorganization, either out-of-court or pursuant to a Chapter 11 petition be sure to consider the impact of cancellation of debt income in your workout plan. Loan forgiveness or modifications can give rise to cancellation of debt income which can result in negative income tax consequences for your business or in the case of a pass-through entity at the shareholder level.
However several opportunities to exclude or defer this income exist which should be factored into your workout strategy. In developing any cash flow projections or pro formas consideration needs to be given to the income tax implications depending on whether exclusion of CODI is an option or if deferred that the appropriate deferred tax liability is recognized as part of the income tax provision. For pass-throughs it is equally important to take this under consideration so as not to undermine or negate the benefits of the workout plan.
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