The IRS has recently announced a new compliance campaign that will focus on large businesses suspected of inflating their cost of goods sold (COGS) to reduce their taxable income. This announcement was made on August 8, 2023, by the IRS Large Business & International Division (LB&I).  LB&I Active Campaigns | Internal Revenue Service (irs.gov)

Compliance campaigns are strategic initiatives aimed at identifying potential tax compliance risks. In this case, LB&I has utilized data analysis and suggestions from IRS compliance employees to identify areas of concern. The overarching goal of these campaigns is to enhance the selection of tax returns, pinpoint issues that carry a risk of non-compliance, and optimize the allocation of limited resources for enforcement.

While the exact details of the campaign's focus weren't explicitly provided, the use of the term "inflated" implies that the IRS is particularly concerned about taxpayers who may be overstating their expenses related to the cost of goods sold. This could involve situations where taxpayers are claiming costs that are not eligible to be counted as inventory or are using incorrect methods to determine their year-end inventory balance.

The introduction of this new campaign suggests that the IRS might intensify its scrutiny of companies that report substantial costs of goods sold. Companies selected for examination under this campaign could expect to receive detailed Information Document Request (IDR) notices pertaining to the calculation of inventory costs and the cost of goods sold for federal income tax purposes. These companies should be prepared to address these inquiries.

Taxpayers who fall under the scope of this campaign should review their current practices for determining inventory balances and making tax adjustments, such as those outlined in IRC (Internal Revenue Code) sections 263A and 471. Ensuring that these methods are accurately reflected in their tax returns will be important to avoid potential compliance issues under the new campaign.

It's important for affected taxpayers to work closely with their tax advisors to navigate these requirements and respond appropriately to any requests from the IRS. By doing so, they can minimize the risk of non-compliance and potentially avoid legal consequences.

In light of increasing tensions with China and to bolster economic ties with Taiwan's chip manufacturers, the United States Congress is moving forward to adopt a treaty-like agreement with Taiwan to provide relief from double taxation for businesses engaged in cross-border activities. The legislation, released on July 12, aims to reduce withholding taxes on certain US source payments received by or paid to residents of Taiwan and apply permanent establishment rules to determine tax liabilities. To qualify for the benefits of the legislation, foreign persons must meet specific criteria as "qualified residents of Taiwan." The provisions would only come into effect after Taiwan reciprocates the benefits to US persons.

Reduction of Withholding Taxes

The legislation seeks to reduce the current 30% statutory rate of US federal income tax on specific US source payments (e.g., interest, dividends, and royalties) received by or paid to residents of Taiwan.

Under the proposed legislation, the reduced rates would be 10% for interest and royalty payments, and 15% for dividends.  Dividends may be further reduced to 10% (excluding dividends paid by Regulated Investment Companies) if certain conditions are met. These conditions include being a qualified resident of Taiwan and holding at least 10% of the relevant stock directly for 12 months prior to the ex-dividend date.

Permanent Establishment

Currently, US federal income tax law taxes income that is "effectively connected" with a foreign person's trade or business within the United States at regular income tax rates. The legislation proposes substituting the term "a United States permanent establishment of a qualified resident of Taiwan" for "a trade or business within the United States" in determining tax liabilities.

The term "permanent establishment" may be established through a fixed place of business or through agents authorized to conclude binding contracts in the United States on behalf of the qualified resident of Taiwan.

Qualified Residents of Taiwan

To be eligible for the benefits of the legislation, foreign persons must qualify as "qualified residents of Taiwan."  A person is considered a "qualified resident of Taiwan" if they are subject to tax in Taiwan based on factors such as domicile, residence, place of management, place of incorporation, or similar criteria.  The person must not be a US person, and corporations must meet specific tests resembling the 2016 US Model Treaty's Limitation on Benefits (LOB) article.

Effective Dates

The provisions of the legislation will take effect upon enactment, applicable to amounts paid during relevant periods. The benefits will only apply after the US Treasury Secretary confirms that Taiwan has granted reciprocal benefits to US persons.

Residing in the United States offers varying degrees of flexibility for both resident and nonresident aliens. However, regardless of their duration of stay, non-US citizens may face significant US estate tax consequences if they do not engage in careful planning prior to their demise.

In the United States, estate and gift taxation apply to US citizens and US domiciliaries, subjecting them to a maximum tax rate of 40%. They are granted an exemption amount of $10 million, adjusted for inflation. On the other hand, non-US domiciliaries are also subject to US estate and gift taxation on certain types of US assets, with the same maximum tax rate of 40%. However, they are eligible for a significantly lower exemption of only $60,000, which solely applies to transfers upon death.

Determining domicile for estate and gift tax purposes is a distinct process from determining US income tax residence. Various factors are considered to ascertain US domicile, including statements of intent found in visa applications, tax returns, wills, and other relevant documents. Additional factors include the length of US residence, possession of a green card, lifestyle both in the US and abroad, ties to the individual's former country, country of citizenship, location of business interests, and affiliations with clubs, churches, voting registration, and driver licenses. Failure to meet the established criteria through a facts and circumstances test results in the individual being considered a non-US domiciliary for estate and gift tax purposes. It's important to note that an individual can be considered a domiciliary by multiple countries, and certain assets may be subject to estate or gift tax in more than one jurisdiction.

Tax treaties play a crucial role in defining domicile, resolving dual-domicile issues, mitigating or eliminating double taxation, and providing additional deductions and tax relief. As of January 2022, the US has estate and/or gift tax treaties in place with 16 jurisdictions, including Japan, Canada, the United Kingdom, and Austria. These treaties establish rules and guidelines to ensure fair and equitable treatment of taxpayers. However, it's important to be aware that not all countries have such tax treaties in effect with the United States. For instance, there is currently no estate and gift tax treaty between the US and Korea.

Similar to US citizens, US domiciliaries are liable to be taxed on the value of their worldwide assets upon death, meaning that their estate, regardless of its location, is subject to US estate tax. Conversely, non-US domiciliaries are solely taxed on the value of their US "situs" assets. US situs assets generally include real estate, tangible personal property situated in the US, business assets located within the US, and stocks of US corporations. The definition of US situs assets may be influenced by applicable estate and gift tax treaties.

Regarding gift tax, US citizens and domiciliaries are subject to tax on all lifetime gifts, regardless of the location of the property. In contrast, non-US domiciliaries are only subject to US gift tax on transfers of tangible personal property and real property located in the US.

To minimize the impact of estate and gift taxes, individuals can take advantage of available annual exclusions or deductions, including marital or other deductions. The remaining exemption amount can then be used to offset taxable gifts or bequests. It's important to note that any portion of the exemption used during an individual's lifetime will not be available as an exemption upon their death. Non-US domiciliaries have no exemption amount available for lifetime transfers, and the exemption amount for transfers upon death by non-US domiciliaries is only $60,000.

Additionally, individuals should consider the generation-skipping transfer tax (GST tax) alongside estate and gift taxes. The GST tax is imposed in addition to estate or gift taxes and applies to certain transfers made to beneficiaries who are two or more generations below the donor, such as grandchildren. The GST tax also applies to gifts made to unrelated individuals who are more than 37.5 years younger than the donor. However, certain circumstances may allow for a GST annual exclusion, and there exists a GST exemption that exempts $12,060,000 (the same as the estate and gift tax exemption, adjusted for inflation) of assets from the GST tax.

Non-US citizens who reside, work, or own property in the US must have a comprehensive understanding of the potential implications arising from US estate and gift tax rules. Residency and domicile choices carry significant tax implications that can impact an individual's financial planning and wealth preservation strategies. It is highly advisable for individuals in such situations to seek the guidance of an international estate planning professional to assess the impact and develop an appropriate approach based on their individual circumstances.

A crucial caveat to consider is that the current exemption amount of $12,060,000 is temporary and applicable only until 2025. Unless Congress enacts permanent changes, the exemption will revert to $5.49 million (adjusted for inflation) after 2025. Therefore, it is essential for individuals to explore how to make the most of this increased exemption before it expires.

Additionally, US citizens who renounce their citizenship and long-term residents (as defined in IRC section 877(e)) who end their US resident status may be subject to expatriation tax under IRC section 877A. Covered individuals are subject to income tax on the net unrealized gain in the year of expatriation as if the property had been sold for its fair market value ("mark-to-market tax"). Additional information will be furnished on our next newsletter.

As global mobility becomes increasingly prevalent among individuals and companies, more people will be affected by multinational tax rules. It is crucial for individuals acquiring US property or planning to move to the US to carefully consider the necessary steps to ensure they are adequately prepared for potential US estate and gift tax implications.

미국에 거주하는 것은 거주자와 비거주자 모두에게 다양한 유연성을 제공한다. 하지만 미국 비시민권자는 체류 기간과는 상관없이 사망 전에 신중한 계획을 세우지 않을 경우 상당한 미국 상속세의 영향을 받을 수 있다.

미국에서는 상속 및 증여세에 대한 과세가 미국 시민 및 미국 거주자에게 적용되어 최대 40%의 세율이 부과된다. 그들은 인플레이션에 따라 조정되는 1,000만 달러의 면제액을 받을 수 있다. 한편, 미국 거주자가 아닌 사람들도 특정 유형의 미국 자산에 대해 미국 상속세와 증여세 과세를 받으며 최대 40%의 세율이 적용된다. 하지만, 그들은 사망 시에만 적용되는 6만 달러의 매우 낮은 면제액을 받을 수 있다.

미국 상속 및 증여세 목적의 거주지 결정은 미국 소득세 목적의 거주지 결정과는 다른 절차로 비자 신청서, 세금 신고서, 유언서 및 기타 관련 문서 등 여러 가지 요소가 고려된다. 미국 체류 기간, 영주권 소지 여부, 미국 내외에서의 생활 방식, 출신 국가와 국적, 사업 관심사의 위치, 클럽, 교회, 투표 등록 및 운전 면허증 등이 추가적인 고려 요소이다. 이러한 사실과 상황을 테스트하여 정해진 기준을 충족하지 못할 경우 해당 개인은 상속 및 증여세 목적으로 미국 비거주자로 간주된다. 중요한 점은 개인이 여러 국가에서 거주자로 간주될 수 있으며, 특정 자산은 여러 관할구역에서 상속 및 증여세의 대상이 될 수 있다는 것이다.

조세조약은 거주지를 정의하고 이중 거주지 문제를 해결하며 이중 과세를 완화하거나 제거하고 추가 공제와 세금 혜택을 제공하는 데 중요한 역할을 한다. 2022년 1월 기준으로, 미국은 일본, 캐나다, 영국, 오스트리아를 포함한 16개 국가와 상속 및 증여세 조약을 체결하였다. 이러한 조약은 납세자에 대한 공정하고 공평한 대우를 보장하기 위한 규칙과 지침을 수립한다. 하지만 모든 국가가 미국과 조세조약을 체결한 것은 아니며, 현재 미국과 한국 간에는 상속 및 증여세 조약이 없는 상황이다.

미국 시민과 유사하게 미국 거주자도 사망 시 전 세계 자산 가치에 대해 과세를 받으므로 그들의 재산은 미국 상속세의 대상이 된다. 반면에, 미국 비거주자는 미국 “situs” 자산의 가치에 대해서만 과세를 받는다. 일반적으로, 미국 situs 자산에는 미국 내의 부동산, 미국에 위치한 유형 자산, 미국 내 사업 자산, 그리고 미국 기업의 주식 등이 포함된다. 미국 situs 자산의 정의는 해당하는 상속 및 증여세 조약에 의해 영향을 받을 수 있다.

미국 시민과 거주자는 자산의 위치와 관계없이 모든 일생 선물에 대해 과세를 받는다. 이에 반해, 미국 비거주자는 미국 내에 위치한 유형 자산과 부동산에 대한 증여에 한정하여 미국 증여세 과세 대상이 된다.

상속 및 증여세의 영향을 최소화하기 위해 개인은 연간 면제액이나 공제액을 활용할 수 있다. 이에는 배우자 공제 및 기타 공제가 포함된다. 남은 면제액은 과세 대상 증여나 유증을 상쇄시키는 데 사용될 수 있다. 다만, 개인이 일생동안 사용한 면제액은 사망 시 면제액으로 사용할 수 없다는 점을 유념해야 한다. 미국 비거주자는 일생동안 사용 가능한 면제액이 없으며, 미국 비거주자의 사망 시 증여에 대한 면제액은 단지 6만 달러이다.

뿐만 아니라 개인은 상속 및 증여세와 함께 세대생략세 GST tax (generation-skipping transfer tax)도 고려해야 한다. GST tax는 상속세나 증여세에 추가로 부과되며, 증여자로부터 두 세대 이상 아래에 있는 수증자들 (예: 손자, 손녀)에게 이루어지는 특정 증여에 적용된다. 또한, GST tax는 증여자보다 37.5세 이상 어린 친족이 아닌 개인들에게 이루어지는 증여에도 적용된다. 그러나 특정 상황에서는 GST 연간 면제액을 사용할 수 있으며, GST tax에서 $12,060,000 (상속 및 증여세 면제액과 동일하게 인플레이션에 따라 조정)에 해당하는 자산을 면제시킬 수 있는 GST 면제액이 존재한다.

미국에 거주 혹은 근무하거나 미국에 재산을 소유하고 있는 미국 비시민들은 미국 상속 및 증여세 규정으로 인해 발생할 수 있는 잠재적 영향에 대한 이해를 가지고 있어야 한다. 거주지 선택은 개인의 재무설계와 부의 보전 전략에 상당한 세금 영향을 미칠 수 있다. 이러한 상황에 있는 개인들은 개별 상황을 고려하여 세금 영향을 판단하고 적절한 대응 방안을 모색하기 위해 국제 estate planning 전문가의 지도를 받을 것을 권장한다.

고려해야 할 중요한 주의사항은 현재의 $12,060,000 면제액이 일시적이며 2025년까지만 적용된다는 점이다. 의회가 영구적인 변경을 시행하지 않는 한, 면제액은 2025년 이후에 인플레이션을 고려한 $5.49백만 달러로 되돌아갈 것이다. 따라서 개인들은 이 면제액이 만료되기 전에 어떻게 최대한 활용할지 탐색하는 것이 중요하다.

또한, 미국 시민권을 포기하는 미국 시민들과 장기 거주자들 (IRC section 877(e)에서 정의된 바에 따른)은 IRS section 877A에 따라 국적포기세를 부과받을 수 있다. 해당 대상 개인들은 국적포기 연도에 미실현 이익의 순액에 대해 소득세를 부과받으며, 이는 마치 그 자산이 시장 가치에 따라 판매된 것으로 간주되는 “mark-to-market tax”이라고도 한다. 자세한 내용은 다음 뉴스레터에서 살펴보도록 하겠다.

개인과 기업들 사이에서 글로벌 이동성이 점차 보편화되면서 다국적 세금 규정에 영향을 받는 사람들이 증가할 것으로 예상된다. 미국 자산을 취득하거나 미국으로 이주를 계획하는 개인들은 잠재적인 미국 상속세와 증여세 영향에 대비하기 위해 필요한 조치를 신중하게 고려해야 한다.

The Financial Accounting Standards Board (FASB) is proposing changes to the income statement presentation for public businesses, with the primary objective being the disaggregation of expenses in the income statement and related footnote disclosures. This means that companies would need to provide a more detailed breakdown of their expenses, including costs that are initially capitalized as part of inventory and later expensed when sold. The FASB is focusing on disclosing the total "natural cost" incurred and reconciling it to the amount expensed, which is particularly relevant for costs that are capitalized in inventory and then flow through the Cost of Goods Sold (COGS) when the inventory is sold.

For publicly traded companies, this disclosure requirement will impact their income statements. It's worth noting that the International Accounting Standards Board (IASB) has already implemented a fully disaggregated disclosure requirement for companies using IFRS. As a result, U.S. companies with parent companies in Korea, subject to the full disclosure rule, might also need to furnish relevant information to meet these requirements.

If you're looking for more information or a deeper understanding, you can refer to the resources provided, such as the video and the Proposed Accounting Standards Update from FASB that offers an overview of the proposed rule regarding the disaggregation of income statements. This should aid in comprehending the new requirement and its implications for financial reporting.

Video Clip: Disaggregation—Income Statement Expenses: A Deeper Dive - YouTube

Proposed Accounting Standards Update: Proposed Accounting Standards Update—Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40)—Disaggregation of Income Statement Expenses (fasb.org)

Overall, the key concept is that the FASB wants companies to disclose the detailed breakdown of expenses, including those that are initially capitalized and later expensed, such as labor costs related to manufacturing inventory. This disclosure aims to provide a clearer picture of the financial performance and cost structure of businesses.

The U.S. Tax Court recently issued a memorandum opinion in the case of Betz v. Commissioner, T.C. Memo 2023-84. The ruling pertains to the eligibility of taxpayers for a research tax credit under IRC section 41. The court ruled against the taxpayers and disallowed the claimed credits, while also imposing accuracy-related penalties under section 6662(a), in addition to underpayment penalties, for the tax years 2014, 2015, and 2016.

Section 6662(a) imposes an accuracy-related penalties on any portion of an underpayment of tax required to be shown on a return if such underpayment is attributable to negligence or disregard of rules, or substantial underpayment of income tax.  Penalties may amount to 20% to 40% of underpaid taxes, depending on the circumstances.

It is essential to understand that not only were the claimed research tax credits disallowed, but the taxpayers were also subjected to accuracy-related penalties. This emphasizes the importance of diligently adhering to the necessary documentation and eligibility requirements when claiming tax credits.

We strongly urge you to carefully review your own research tax credit claims, ensuring that all essential criteria are met to avoid potential issues and penalties.

As mentioned in our newsletter dated November 9, 2021 Transfer Pricing Regime Change for Maquiladora Companies | KYJ, LLP (kyjcpa.com), revisions to the Mexican Income Tax Law (IT Law) in 2022 removed the option to request an Advance Pricing Agreement (APA).  However, there was a provision in the IT Law allowing for APA requests for the tax year 2021, which will remain effective until 2024. Consequently, Maquiladora companies that submitted an APA request in 2021 will be obligated to adopt the Safe Harbor method from 2025 onwards.

Under the Safe Harbor rules, the taxable base for Maquiladoras must be calculated as either 6.9% of their total asset value or 6.5% of their operating costs, whichever is greater.  Application of the Safe Harbor method instead of an APA will likely result in a higher taxable income for Maquiladoras, leading to increased corporate tax and employee profit sharing (PTU).  This, in turn, translates to higher expenses for foreign enterprises operating Maquiladoras in Mexico.

The impact of this change will be particularly significant for Maquiladoras with substantial capital assets, such as real estate. It is therefore advisable for Maquiladoras to seek guidance from their Mexico tax advisor in advance to explore planning ideas and strategies aimed at mitigating the adverse effects of the mandatory Safe Harbor rule.  Some potential considerations include restructuring operations in Mexico, such as spinning off or transferring real estate to a Mexican entity and entering into a fair rental agreement.  Additionally, reviewing the language of the U.S.-Mexico income tax treaty is crucial to determine what should be included in the asset pool subject to the safe harbor tax.  It is vital to carefully model, review, and analyze all such planning measures before implementation.

We understand that many businesses are currently navigating through a challenging period of time due to the uncertainties in the global economy.  To achieve financial stability, it is crucial for companies to take proactive steps and adapt to changes in both foreign and domestic legislation.  At our firm, we fully recognize the importance of this and are actively collaborating with our alliance firms in Mexico to gather and share pertinent information on the matter with our clients.  We are committed to keeping you informed and will promptly share the information as it becomes available.

2021년 11월 9일자 Transfer Pricing Regime Change for Maquiladora Companies | KYJ, LLP (kyjcpa.com) 뉴스레터에서 언급한 바와 같이, 2022년 멕시코 소득세법(IT Law) 개정으로 이전가격 사전승인제도 (APA) 요청 옵션이 제거되었다. 그러나 IT Law에는 2021년 과세 연도에 APA 요청을 허용하는 조항이 있어 2024년까지 유효하다. 따라서 2021년에 APA 요청을 제출한 Maquiladora 회사는 2025년부터 Safe Harbor method을 채택해야 한다.

Safe Harbor method에 따라 Maquiladoras의 과세 기준은 총 자산 가치의 6.9% 또는 운영 비용의 6.5% 중 더 큰 금액으로 계산해야 한다. APA 대신 Safe Harbor method을 적용하면 Maquiladora 회사들의 과세 소득이 높아져 법인세 및 직원 이익분담금 (PTU)이 증가할 가능성이 높다. 즉, 멕시코에서 Maquiladora를 운영하는 외국 기업의 비용 증가로 이어진다.

이러한 변화의 영향은 부동산과 같은 상당한 자본 자산을 보유한 Maquiladora회사에게 특히 중요하다. 따라서 Maquiladora기업은 의무적인 Safe Harbor method의 부작용을 완화하기 위한 계획과 전략을 모색하기 위해 사전에 멕시코 세무 고문의 자문을 구하는 것이 좋다. 몇가지 잠재적인 고려 사항들로 부동산을 다른 멕시코 법인으로 이전하고 이 법인과 공정한 임대 계약을 체결하는 방법 및spinning off 와 같은 멕시코에서의 구조 조정 방법이 있다. Safe Harbor tax가 적용되는 asset pool에 어떤 자산이 포함되어야 하는지 결정하는데 있어서 미국-멕시코 소득세 조약을 검토하는 것 또한 중요하다. 위와 관련된 조치를 실행에 옮기기 전 모든 계획을 신중하게 모델링, 검토 및 분석하는 것이 중요할 것이다.

현재 세계 경제의 불확실성으로 인해 많은 기업들이 어려운 시기를 헤쳐 나가고 있음을 이해한다. Financial stability를 달성하기 위해서는 기업이 국내외 법규 변화에 능동적으로 대처하고 적응하는 것이 중요할 것이다.

2023년에는 파산 신청의 뚜렷한 증가가 나타났다. 1월과 2월만으로도 작년 동일 기간과 비교하여 각각 19%와 18%의 상당한 상승세를 보였다. 파산 신청의 계속적인 증가는 가계와 기업이 직면한 경제적 어려움을 반영하고 있다. 전문가들은 이러한 추세를 인플레이션과 공급망 붕괴로 설명하며, 이 문제는 계속해서 지속되어 파산 신청의 증가에 기여할 것으로 예상된다.

경제적 불확실성이 있는 시기에는 세무 전문가들이 빚 상환과 구조조정의 결과에 관한 많은 문의를 받는다. 특히 빚 탕감으로 인한 cancellation-of-debt (COD) 소득에 대해 많은 질문이 있다. COD 소득의 발생 여부는 채무조건변경, 자본 발행, discounted debt acquisition, satisfaction of debt through contingent value rights, discharge of debt within or outside bankruptcy, 자산 압류 등과 같은 다양한 상황에 따라 달라진다.

COD 소득은 Internal Revenue Code (IRC) Section 61에 따라 세무법에 명시 되어있는 특정 경우를 제외하고는 기본적으로 과세 대상이다. 하지만 Section 108은 일부 경우에 COD 소득이 비과세 대상이 될 수 있는 조항을 제공한다. 이 글에서는 COD 소득에 적용되는 두 가지 면제 조항인 bankruptcy exclusion과 insolvency exclusion에 대해 알아보겠다.

Bankruptcy exclusion의 경우, 파산 절차에서 빚이 면제되어 발생하는 COD 소득은 과세 대상에서 제외될 수 있다. 이 exclusion은 금융 부담을 줄이기 위해 파산 보호를 신청한 개인과 기업에게 유익하다. 다만, 이 exclusion은 파산과 무관한 채무조건변경이나 다른 상황에서 발생하는 COD 소득에는 적용되지 않는 점을 유의해야한다.

Insolvency exclusion은 COD 소득의 과세 면제를 위한 또 다른 방법을 제공한다. 이 exclusion은 빚이 면제되기 직전에 지급불능 상태에 있는 납세자에게 적용된다. 지급불능이란 개인 또는 기업의 총 부채가 자산의 공정 시장 가치를 초과하는 상황을 의미한다. 이러한 경우에는 면제 대상이 되는 COD 소득의 금액이 지급불능 상태에 따라 제한된다. 파트너십의 경우, 지급불능 상태는 파트너 수준에서 결정되며, 면제는 파트너십 수준이 아닌 파트너 수준에서 이루어진다.

Bankruptcy 혹은 insolvency exclusion에 따른 COD 소득의 과세 면제는 일반적으로 시기적인 요소로 이월결손금, 일반 사업 세액 공제, 자본 손실 이월, 외국납부세액공제 등을 포함한 납세자의 tax attributes (Sec. 108(b)와 1017 참조)을 줄여 소득을 나중에 인식하도록 하는 것이다.

2023년에 파산 신청이 계속해서 증가하고 있는 가운데 재정적으로 어려움을 겪는 개인과 기업은 빚 상환과 구조조정의 세무적 영향을 알고 있어야 한다. 일반적으로 COD 소득은 과세 대상이지만 IRC Section 108이 제공하는 일부 면제 조항은 파산이나 지급불능 상황에 있는 개인이나 기업에게 세금 혜택을 제공한다. 이러한 면제 조항을 이해하면 경제적 불확실성과 재정적 어려움이 계속되는 상황에서 개인과 기업은 세금 부담을 완화할 수 있다.

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.