Market Discount Remains Deferrable

The IRS recently released Notice 2018-80, which confirms that market discount will continue to be eligible for deferral after tax reform.

Market discount occurs when a debt instrument is purchased in the secondary market at an amount less than its stated redemption price at maturity. Unless a taxpayer elects under Section 1278 to ratably accrue the market discount as income, the market discount is deferred until a realization event, such as one of these:

• The sale of the debt instrument 
• The receipt of a principal payment
• The satisfaction of the debt instrument by the issuer

Section 451(b) was modified by 2017’s tax reform to require accrual taxpayers to include items in taxable income no later than the time the income is recognized for GAAP. This rule does not apply to any item of gross income for which the taxpayer uses a special method of accounting, other than items accounted for under a provision of Part V of Subchapter P, which contains Sections 1271 through 1288. Because GAAP does not provide for the deferral of market discount, there was concern that the IRS would interpret Section 451(b) to require annual inclusion of market discount. In Notice 2018-80, the IRS indicates it intends to issue regulations providing that accrued market discount is not includible in income under Section 451(b). Once issued, the regulations will be effective as of Jan. 1, 2018.