U.S. Stimulus Package Includes Significant Tax Provisions For U.S. Businesses

On February 17, 2009 U.S. President Barack Obama signed

into law the "American Recovery and Reinvestment Act of

2009" – a package of spending provisions and tax

incentives with an estimated cost of US$787 billion. While many of

the provisions are targeted to relieving the tax burden on

individuals and small businesses and providing incentives for

renewable energy, infrastructure and state and municipal bonds, the

legislation includes several significant changes to the U.S. tax

regime generally applicable to U.S. businesses.

Tax Incentives for Business

Elective deferral of income from cancellation of

indebtedness

The legislation permits taxpayers to elect to defer income from

cancellation of indebtedness (COD) recognized as a result of a

repurchase (or deemed repurchase) of the taxpayer's

indebtedness by the taxpayer or a related person. The taxpayer

electing deferral will generally be able to defer tax on the COD

income until 2014 and recognize the COD income rateably over the

following five taxable years. The provision applies only to

repurchases of debt that occur in 2009 or 2010. Unlike some earlier

drafts of the provision, there is no requirement that the debt

repurchase be made with cash; the provision explicitly applies to

COD income arising from debt-for-debt or debt-for-equity exchanges,

as well as deemed repurchases resulting from a "significant

modification" of debt.

The election can be made by taxpayers on a debt-by-debt basis.

Electing taxpayers are required to forego any future exclusion of

COD income that would potentially be available under certain other

provisions (for example, the exclusion of COD income for insolvent

debtors). Any deferred COD income is accelerated in certain

circumstances, including on a liquidation of the taxpayer or the

sale of substantially all of its assets. Each eligible taxpayer

with COD income will need to carefully consider the advisability of

electing deferral based on its particular circumstances.

Suspending the application of the applicable high yield debt

obligation rules to certain debt exchanges

The applicable high yield debt obligation (AHYDO) rules generally

limit the deductibility of original issue discount on high-yield

debt instruments maturing in more than five years that are issued

at a significant discount. The legislation suspends the application

of these rules to debt issued (or deemed issued) in exchange for

debt that was not previously subject to the AHYDO rules, if the

exchange...