Question

How are initial issue discount bonds currently taxed by the IRS and how does this impact the placement market for these bonds?

Answer 1

As per Provisions of IRS , Initial issue discount bonds are taxed in the hands of buyer.

For Buyer , discount is an income and it has to be accrued over the period of Bond maturity period so that each year it will be taxed in the hands of buyer for that accrued income.

For seller , discount is an expense and it has to be accrued over the period of Bond maturity period so that each year it will be allowed as deduction from income tax in the hands of seller for that accrued expense.

following are Impacts on placement in market for these bonds :

1. If bonds are issued at discount then chances of full application to these bonds become high. All bonds will be sold in the market if they are issued with discount.

2. Compliance of partial application to bonds can be avoided as chances for full application to discounted bonds are high.

3. Rate of return on bond can be kept low if bonds are initially discounted & it results in lower interest on bond payable every year.

4. Future cash flow of interest on bond payable every year can be effectively managed.