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Home Builders Stress Need to Prevent Taxation on Phantom Income

NAHB this week called on Congress to take measures to prevent taxation on “phantom income” in order to help small businesses to avoid major tax liabilities on income never received.

In written testimony submitted to the House Ways Means and Committee during a hearing on tax policies and accounting rules that harm small businesses, NAHB detailed how phantom income taxes are taking a toll on many builders across the nation. Phantom income is taxable income that does not generate cash flow. For example, if a bank writes off a $75,000 construction loan to a home building firm, the company would owe the IRS taxes on that $75,000 of debt forgiveness.

In the wake of the worst housing downturn since the Great Depression, many small businesses, including home builders, have had to work with lenders to mitigate troubled loans. Such actions typically involve changes to the loans that constitute cancellation of debt.

Unfortunately, the only option for some companies to erase a crippling tax liability arising from old debt workouts is to declare bankruptcy or become insolvent. Unlike large companies that go through this process and emerge with new lines of credit, bankruptcy for small family-owned firms can mean the end of generations-old family enterprises.

To help small businesses to continue their traditional role as an engine of job growth, NAHB is calling on Congress to provide a tax exclusion for business debt forgiveness and allow this exclusion to continue until the business economic climate substantially improves.

“Such a tax policy change would enable small, family-owned firms to avoid bankruptcy and contribute to the economic recovery as individual local markets improve,” the NAHB statement said.

NAHB Chairman Barry Rutenberg delivered a similar message in a recent letter to the editor submitted to USA Today.

For more information, email J.P. Delmore at NAHB or call him at 800-368-5242 x8412.

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