By now, we are all aware of the level of scrutiny the accounting and regulatory environment has placed on a financial institution to properly identify and report troubled debt restructurings (TDRs), but have we forgotten something? Considering all the additional guidance as it relates to the process, identification, tracking, and
accounting of TDRs for book purposes, what are the tax implications? Things really haven’t changed that much, have they? The volume is what has changed, and with volume, even with a negative undertone of a TDR, there can be a “silver lining”—tax deductibility.
To reaffirm and put it simply, TDRs occur when a financial institution grants a concession to a borrower, that it would not otherwise consider, for economic or legal reasons related to the borrower’s financial difficulties. The Financial Accounting Standards Board (FASB) has recently issued Accounting Standards Update (ASU) 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debit Restructuring, clarifying when loan modifications or restructurings are TDRs (see Troubled Debt Restructuring: An Accounting Update). Once identified, TDRs should be reviewed to determine if the concessions granted are significant enough to
constitute a taxable exchange of debt instruments for income tax purposes. IRS Regulation 1.1001-3 Modifications of Debt Instruments provides rules for determining whether a modification of the terms of a loan results in an exchange of debt instruments.
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