Lesson 4-Objectives

After completing this lesson, students should be able to:

1.	Discuss the incentive that exists in the tax code that makes it attractive to fund corporate business activity with debt rather than with equity.

2.	Understand the concept of “integration” of corporate and individual income taxes, and identify ways in which corporations can already achieve a level of integration under the present system.

3.	State the “classic” general definitions of debt and equity.   

4.	Identify and discuss factors that are used to classify securities that fall in between the extremes of pure equity and pure debt, including “hybrid” securities.

5.	Identify and discuss factors relevant in classifying debt issued to shareholders of corporations.

6.	Analyze the features of hypothetical securities instruments and reach a conclusion based on analysis of relevant factors as to whether the security should be classified as debt or equity.

7.	Explain the risks associated with the issuance of debt by S Corporations.

8.	Explain the effect an S corporation’s debt to shareholders and non- shareholders has on the shareholders’ ability to currently deduct losses of the corporation.