TAX TOPICS
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TAX CONSIDERATIONS FOR BUSINESSES CONSIDERING BANKRUPTCY By David Gair and Brian Clark “How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” Ernest Hemingway, The Sun Also Rises (1926). The COVID-19 pandemic has been horrendous in both human and economic costs. As of the end of May 2020, there were approximately 1,750,000 positive cases and over 100,000 deaths in the U.S. and they were continuing to climb.i By comparison to the country’s wars, only the Civil War and World War II resulted in more U.S. deaths.ii The combination of a global pandemic and sagging energy industry leads many economists to suggest growth will remain sluggish. Like Hemingway’s Mike, a
14 Texas Society of CPAs
company’s fortunes can decline over time, but its crash can be sudden. High profile companies in a variety of industries have already filed for bankruptcy, including J. Crew, Pioneer Energy, Pier 1, McDermott International, and Dean & Deluca. Companies forced into bankruptcy or financial restructuring have debt and liquidity problems. The issues are loaded with tax consequences, such as income from the cancellation of indebtedness, loss of tax attributes and potential payroll tax liability risk for owners. However, tax considerations alone are rarely the reason businesses seek bankruptcy protection or restructure debt. Although not the main driver, tax considerations are important, and thoughtful front-end planning can maximize tax benefits of bankruptcy and workouts. This
