Debt Financing – What You Need to Know
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Jen: This is the PKF Texas Entrepreneur's Playbook. I'm Jen Lemanski, and I'm back again with Frank Landreneau, a Director and one of the faces of our International Tax team. Frank, welcome back to the playbook.
Frank: It's great to be back.
Jen: In our last segment, we were talking about mistakes that multi-foreign multi-national companies can make when they're doing some debt financing. Can you elaborate a little bit more on that?
Frank: One example would be: you know when companies first start out, they’re not necessarily knowledgeable about what their financing needs might be, so they make a short-term loan or advance considering it short-term. They don't charge interest and don’t document it as a loan. They accrue interest.
And the results of that is that it may not be respected as debt, so when a repatriation payment – let’s say they want to bring profits back to the home office outside the U. S. – the payment may be considered, as opposed to being considered a loan repayment, the IRS would consider it a dividend payment, which could trigger some withholding taxes if not treated properly.
Jen: Interesting. And now where do interest expense deductions come into this?
Frank: That's another result of faulty planning – is that if the company has been leveraged too much and whereas the debt is too significant and no equity financing is used, then interest deductions may not be allowed, because there are new limitations. Some of these limitations existed, but the formula has changed.
Jen: Now are those limitations permanent or is it a short-term thing?
Frank: No it's actually – the way it's computed is there is 30 percent of your adjusted taxable income. So there's certain – you take your taxable income with certain add backs and deducts, take 30 percent of it, it's carried forward indefinitely, so it's not a permanent deal, but if your U.S. company is not, if you don't manage profits appropriately and you have losses, then they could become long-term denials of deductions, which could become quasi-permanent.
Jen: And at what point would somebody call an advisor like you to help them kind of prepare for something like this?
Frank: I would say right from the start. PKF Texas has something called International Healthy Start program. And that type of planning, along with other types of planning like transfer pricing or other types of considerations when you come to the U.S., is all part of the mix of what we provide as a service offering to clients.
Jen: All right. Well, great to know. Well, we will get you back to talk some more international tax soon.
Frank: I'd love to, there's a lot to talk about.
Jen: All right. Great. Thanks, Frank. To learn more about other international topics including transfer pricing, visit www.PKFTexas.com/InternationalDesk. This has been another thought leader production brought to you by PKF Texas the Entrepreneurs Playbook. Tune in next week for another chapter.