This Alert reminds holders of debt instruments that the final regulations under IRC Section 451(b) now apply to certain non-credit card debt-related fees for tax years beginning on or after January 6, 2022. Such holders, therefore, may now be required include these fees in gross income upon receipt.

Background

Before the final regulations were published, taxpayers historically treated certain credit card and other debt-related fees as creating or increasing original issue discount (OID), thus permitting these items of income to be deferred over a substantial period. The final regulations changed that treatment by requiring IRC Section 451(b) to apply before the OID rules to any item of income that:

• Is attributable to any fee on a debt instrument (whether or not a credit card receivable)
• Is not spread over time as discount or as an adjustment to the yield of the debt instrument in the taxpayer's applicable financial statement
• Would otherwise be treated as creating or increasing OID for tax purposes

An exception applies if the specified fee would create only de minimis OID.

Under the statutory rule, taxpayers were required to change their treatment of credit card fees for tax years beginning after December 31, 2018.

For non-credit card debt-related fees, however, the change applies to tax years beginning on or after January 6, 2022. The later effective date was designed to give the Treasury and the IRS additional time to determine whether to narrow the definition of "specified fees." The Treasury and the IRS have yet to exercise their authority to narrow the definition.

Implications

Effective for tax years beginning on or after January 6, 2022, holders of debt instruments must include non-credit card debt-related fees in income if those fees (1) are not spread over time as discount or as an adjustment to the yield of the debt instrument in the taxpayer's applicable financial statement; and (2) do not otherwise result in de minimis OID. Accordingly, taxpayers should ensure that their systems are updated to capture these types of fees into gross income currently.

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