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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16538
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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is interest from a convertible note taxable if it is to be

Resolved Question:

is interest from a convertible note taxable if it is to be converted into equity?
Submitted: 3 years ago.
Category: Finance
Expert:  Megan C replied 3 years ago.

MyVirtualCPA :

Thank you for your question, and thanks for using JustAnswer.com

MyVirtualCPA :

How are you today?

Customer:

fine thanks, XXXXX XXXXX?

MyVirtualCPA :

Good. Interest on convertible debt is taxable to the debtor at the time it accrues, not when it is ultimately paid

MyVirtualCPA :

So, in short - yes, interest is taxable on a convertible note even if it is going to ultimately become equity

Customer:

and even if it is not paid in cash

MyVirtualCPA :

That is correct

MyVirtualCPA :

It is taxable when it is accrued

Customer:

any implication to the company?

MyVirtualCPA :

If the holder has to claim the interest as income, the company can deduct interest expense

Customer:

is there a reporting requirement by the company to the IRS?

MyVirtualCPA :

You will issue a 1099-INT for the amount of interest income paid to the debtor

Customer:

now comes the hard part... the company was formed in Cyprus. It is an Ltd with Articles of Association in Cyprus. It is not yet a US Inc. Investors are from Russia, Germany and the US.

MyVirtualCPA :

Okay

Customer:

How does that affect the interest tax liability

Customer:

if at all

MyVirtualCPA :

The US investors would have interest income but there's no reporting requirement by the company if the company is not doing business in the US

Customer:

the company is in startup mode, and we are hoping to retrieve it from the edge of bankruptcy. it has no sales. and expenses have only been mostly for patent prosecution during the past few years.

Customer:

so it is up to the debt holders in each country to report their accrued interest for each year?

MyVirtualCPA :

Yes, that is correct. I could not tell you about any other country's liability other than the US

Customer:

right. thanks. so to summarize... it is up to the individual investors to report their interest income in each jurisdiction. interest income from a convertible note is taxable whether or not it is paid or converted into equity. yes?

Customer:

thank you

MyVirtualCPA :

That is correct

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16538
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 2 other Finance Specialists are ready to help you
Expert:  Megan C replied 3 years ago.
Thank you for your positive rating. Please come back and visit MyVirtualCPA for any of your tax, finance, or social security needs. It was a pleasure working with you today.