medium · Private Equity accounting-flow
If a borrower is subject to interest deductibility limitations under Section 163(j), how does this specifically alter the CFO impact of PIK interest?
- It forces the PIK interest to be paid in cash immediately in order to satisfy applicable federal tax filing rules.
- It has essentially no impact at all, since PIK interest is never tax-deductible until the underlying loan is fully repaid at maturity.
- It increases reported cash flow because the company is no longer permitted to recognize the interest expense on its Income Statement.
- It reduces the tax shield provided by the PIK expense, resulting in lower cash flow than if the interest were fully deductible
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