COD Income Deferral: What Do The States Think?

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If your company or your client has experienced cancellation of debt (COD) income over the past couple of years, then you are probably aware of the federal income tax legislation that allows taxpayers to defer the income.

Unfortunately, several states have 'decoupled' from the legislation; meaning they will not allow the deferral. Currently, the following states have decoupled: CT, FL, IN, ME, MD, MA, MN, NJ, NC, OR and RI). More may be on the way. In addition to the 'decoupling' issue, several state income tax questions come into play when a company experiences COD income.

  1. Is the COD income "business" or "nonbusiness" income?
  2. Should the COD income be included in the apportionment factor?

At this time, most states have not addressed either of these issues. Until they do, companies will be forced to apply general rules and guidelines to reach reasonable conclusions.

For assistance with your company's state and local taxation of COD income, please contact me at brian.strahle@bakertilly.com.

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