Debt Financing – What You Need to Know

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 thefaces of our International Tax team.

Frank, welcome back to the playbook.

It's great to be back.

In our last segment, we were talking aboutmistakes that multi-foreign multi-national companies can make when they're doing somedebt financing.

Can you elaborate a little bit more on that?One example would be: you know when companies first start out, they're not necessarily knowledgeableabout what their financing needs might be, so they make a short-term loan or advanceconsidering 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 notbe respected as debt, so when a repatriation payment – let's say they want to bring profitsback to the home office outside the U.


– the payment may be considered, as opposedto being considered a loan repayment, the IRS would consider it a dividend payment,which could trigger some withholding taxes if not treated properly.


And now where do interest expense deductions come into this?That's another result of faulty planning – is that if the company has been leveraged toomuch and whereas the debt is too significant and no equity financing is used, then interestdeductions may not be allowed, because there are new limitations.

Some of these limitationsexisted, but the formula has changed.

Now are those limitations permanent or isit a short-term thing? No it's actually – the way it's computed isthere is 30 percent of your adjusted taxable income.

So there's certain – you take yourtaxable income with certain add backs and deducts, take 30 percent of it, it's carriedforward indefinitely, so it's not a permanent deal, but if your U.


company is not, ifyou don't manage profits appropriately and you have losses, then they could become long-termdenials of deductions, which could become quasi-permanent.

And at what point would somebody call an advisor like you to help them kind of prepare forsomething like this? I would say right from the start.

PKF Texashas 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 whenyou come to the U.


, is all part of the mix of what we provide as a service offering toclients.

All right.

Well, great to know.

Well, we willget you back to talk some more international tax soon.

I'd love to, there's a lot to talk about.

All right.


Thanks, Frank.

To learnmore about other international topics including transfer pricing, visit www.



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