It is an unfortunate reality that as the economic repercussions of the COVID-19 pandemic continue to be felt, companies — even those that were performing quite strongly at the start of 2020 — will face significant headwinds, if they haven’t already. Many may need to consider some sort of restructuring of their balance sheet and debt obligations to create a sustainable business model that positions them for success in 2021 and beyond.
Those companies that determine that restructuring is the best path forward need to understand, however, that it will not magically make all of their bills and tax obligations disappear. In fact, any time there is a foreclosure of assets, an exchange of assets for debt, or a reduction of debt, a taxable event is created. Failure to consider the tax implications of restructuring can create complex situations for a business, and bring serious risks to and unintended negative impacts on cash flow and liquidity.
One of the most important — and fundamental – things to consider during a restructuring is often the most overlooked: the type of entity that is being restructured. In a restructuring, tax liabilities are often passed up to the owners of LLCs, partnerships, or individuals, depending on the entity’s makeup. And, since a restructuring always creates a taxable event, stakeholders must carefully consider where the tax liability goes and how it may impact them.