I attended a tax seminar in New York today. I know, I live this wild, exciting life! One of the presenters pointed out a very good point. It is vital that you look at your state tax treatment on the cancellation of debt. While Federal tax law now says you can defer this gain many states do not agree. (Click here to see my previous post regarding the Federal break on the cancellation of business loans.) You could very well have a state tax burden on your canceled debt. Many states that normally base corporate tax on Federal law are “de-coupling” on this issue. This is a tax term that means the state is specifically excluding this break. California is one big state that has not added this break. In the current economic climate, with states desperate for tax dollars, it’s a good bet that most states will not give you benefit of this Federal tax break.

Have you renegotiated a business note or loan? Paid the note holder a lower amount than the principal balance currently owing in satisfaction of the note? This could be a great tip to postpone the tax impact. Yes, I said tax impact. Under normal circumstances the amount of loan that was “extinguished” without being paid should be “Cancellation of Debt” income to you. This applies whether you are operating as a corporation or as an individual. Well the 2009 Recovery Act has come to your rescue. Under the new law if you reacquire business debt you can elect to postpone the payment of tax. This is where it gets good. You get to spread the effects over five years! Not good enough? How about this? Click to continue »