OK. I received only one response on my earlier post asking for loan review help. So, I'll limit this post to a tax question. First, it's my understanding the interest must be reported on a US Govt Zero Coupon Strip Bond (USGCSB) as accrued each year. An exception would be a Municipal Zero Coupon Strip Bond (this is a mouthful).
Again, this USGCSB is being used as a loan guarantee with the lender as the beneficiary.
However, here's what the Commercial lender is saying:
1. The FACE (deposit) amount of the bond is part of the loan. There are no tax liabilities on loan moneys
2. The interest earned on the bond that allows it to grow to the FULL face amount of the bond ( in 20 years ) is ONLY taxable
if the money IS NOT USED to pay off the loan.
3. Assuming ALL loan payments are made from operating cash flow then the annual income accrued will be taxable in 20 years and 1 day.
4. Taxes may be negated to 0 ONGOING pro-rata ( and not waiting the 20 year period) by declaring the annual income from the bond as part of the annual RSL gross income , and the writing off the income to 0 against company operating expenses; or as a single line item expense for loan repayments, paid into escrow each year. Either way the tax quotient on the bond income is ZERO.
What about #2? Is there an exception in this situation?
#4 also doesn't make much sense to me. If you add income to expenses you already have, it doesn't reduce taxable income. And, how do you report the income and show an offsetting escrow payment as an expense?
POST NOTE: NOW, I'M THINKING THE ANSWER IS SIMPLE, AND MAYBE I CAN FORGET THE GIBBERISH.
YES, THE ACCRUED INTEREST EARNED IS INCOME, BUT SINCE THE BOND WAS ISSUED AS A LOAN GUARANTY WITH THE LENDER AS BENEFICIARY, THE INTEREST EARNED IS ALSO AN LOAN EXPENSE. SO, THE TWO OFFSET ONE ANOTHER. IT'S A "WASH".
DOES THAT MAKE SENSE?
Again, this USGCSB is being used as a loan guarantee with the lender as the beneficiary.
However, here's what the Commercial lender is saying:
1. The FACE (deposit) amount of the bond is part of the loan. There are no tax liabilities on loan moneys
2. The interest earned on the bond that allows it to grow to the FULL face amount of the bond ( in 20 years ) is ONLY taxable
if the money IS NOT USED to pay off the loan.
3. Assuming ALL loan payments are made from operating cash flow then the annual income accrued will be taxable in 20 years and 1 day.
4. Taxes may be negated to 0 ONGOING pro-rata ( and not waiting the 20 year period) by declaring the annual income from the bond as part of the annual RSL gross income , and the writing off the income to 0 against company operating expenses; or as a single line item expense for loan repayments, paid into escrow each year. Either way the tax quotient on the bond income is ZERO.
What about #2? Is there an exception in this situation?
#4 also doesn't make much sense to me. If you add income to expenses you already have, it doesn't reduce taxable income. And, how do you report the income and show an offsetting escrow payment as an expense?
POST NOTE: NOW, I'M THINKING THE ANSWER IS SIMPLE, AND MAYBE I CAN FORGET THE GIBBERISH.
YES, THE ACCRUED INTEREST EARNED IS INCOME, BUT SINCE THE BOND WAS ISSUED AS A LOAN GUARANTY WITH THE LENDER AS BENEFICIARY, THE INTEREST EARNED IS ALSO AN LOAN EXPENSE. SO, THE TWO OFFSET ONE ANOTHER. IT'S A "WASH".
DOES THAT MAKE SENSE?
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