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The IRS has issued final regulations under Secs. 163, 446, 483 and 1271-1275 relating to the tax treatment of debt instruments with original issue discount (OID) and the imputation of interest on deferred payments under certain contracts for the sale or exchange of property. These regulations are effective for debt instruments issued after Apr. 3, 1994, and also may be relied on by taxpayers for debt instruments issued after Dec. 21, 1992. The final regulations generally adopt the methodologies established in the most recent proposed rules issued on Dec. 22, 1992.
The final regulations provide guidance to holders and issuers of OID instruments as to when (and how much) income should be reported for accretion of discount or deducted as interest or amortized premium. The regulations also provide a revised treatment for pro rata prepayments and clarify the rules on determination of yield and maturity of a debt instrument with one or more stated contingencies. In addition, the regulations confirm that interest prepaid on a loan at closing should be recognized as OID and deferred over the life of the loan.
While the OID regulations can be complicated, taxpayers should review the rules applicable to debt instruments to benefit from planning opportunities and to avoid unexpected pitfalls.
ISSUERS OF DEBT INSTRUMENTS
Corporations issuing debt obligations now have more definitive guidance for computing the amount of OID for purposes of Form 1099-0ID reporting and for deducting interest expense on their tax returns. (Additional guidance for Form 1099-0ID reporting will be issued later by the IRS.) Generally, the issuer may deduct OID under its overall accounting method (cash or accrual basis) using the constant yield method described in Regs. Sec. 1.1272-1(b). De...