Why do companies not purchase debt at debt collector prices and forgive it like Stephen Colbert did every year to massively reduce their tax liabilities?

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Why do companies not purchase debt at debt collector prices and forgive it like Stephen Colbert did every year to massively reduce their tax liabilities?

In: Economics

For the same reason why you can’t just donate $1 million and save >= $1 million on your taxes – that’s not the way the tax system works, and for good reason.

The company/individual would purchase the debt at debt collector prices, and they’d be able to deduct the COST TO THEM for the debt off of their taxable income. It’s easier to explain in detail with a person so I’ll do that.

You have $100,000 in taxable income. You decide to buy up $20,000 in debt at debt collector prices and pay $5000 for that. You would be able to deduct that $5000 from your taxable income, so your new taxable income is $95,000. That’s in the 22% federal income tax bracket for married, so in actuality you have saved yourself only 22% of that $5000 in taxes owed, or $1100. So you just paid $5000 to “save” $1100.

Disclaimer: I am not a CPA, and do not rely on internet advice from random strangers (non-CPAs or CPAs) for tax advice. See a professional for tax/financial advice.

Off the top of my head 3 reasons

1) Companies already deduct all business related expenses before declaring profit – so the tax benefit might be small or non existent.

2) Stephen Colbert as a private individual makes his own choices and has to justify it to no one else. Companies don’t really have that luxury as they have a duty to shareholders.

3) Similar to above but a company wouldn’t risk the bad PR. Ultimately no company can afford to buy ALL debt. So it takes very little for someone to claim “my debt is more serious than their debt” or “why did you buy the debt from so and so. This other group is more deserving etc etc”.

Consumer debt is purchased, as an asset. It is not purchased as a debt. The negative $15,000 consumer debt becomes a positive $15,000 asset for the company. The older the debt the less money it’s worth you can purchase millions in consumer debt for a few hundred. Technically you could make a company worth five million on paper for less than $1500.

tax deductions only work for what you paid into it. to add on to other examples here, lets say i saw a computer I wanted for work selling for 600 thats usually 2,000. thats a great deal and id snatch it up in a minute. however i can only write it off for the 600 i paid, what its “worth” doesnt come into play. for the record if someone did try to claim it for the original “worth” and not what they actually put i to it that would be in tax evasion territory.