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?

Question

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

Answer 1

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.