Washington Tax Alert – May 23, 2008 – Market discount bonds

Washington Tax Alert from Don Barnes, [email protected]
May 23, 2008

Financial institutions and investors are acquiring bonds, loans and other debt obligations at discounted prices. Typically, these debt instruments have declined in value because the debtor’s creditworthiness has deteriorated. Market discount exists if the taxpayer acquires a debt instrument for an amount less than the principal amount of the debt instrument payable at maturity.

The financial accounting rules for including market discount in income are different from the tax rules, which are set forth in IRC §§ 1276-1278. Taxpayers and their CPA firms should be aware of this difference and the possibility of making an accounting method change for tax purposes.