The debt vs. equity classification, in the tax context, has important implications for both the corporation raising money and the holder of the obligation providing the advance. A corporation may deduct interest payments on debt (under § 163 of the Internal Revenue Code (IRC)), but it cannot deduct dividend payments on equity. Additionally, a corporation may be able to deduct “bad debt” if an instrument can be successfully characterized as debt (under § 166 of the IRC). While debt is taxed once, equity funding is taxed twice: once at the business level, and once at the shareholder level through dividend and capital gains taxes.2 Successfully classifying funding as debt as opposed to equity produces tax advantages for the corporation.
The opposite preference exists for the entity that provides the cash advance. If a cash advance is characterized as equity, the holder of the obligation may receive dividend income taxed at a preferential rate.3 If a cash advance is characterized as a debt, then the interest income from the debt is taxed as ordinary income at the taxpayer’s marginal rate.4
This primer summarizes the key principles, concepts, and considerations relating to the treatment of certain interests in corporations as stock or indebtedness in the tax context. The legal question central to this primer asks whether an interest in a corporation is debt or equity for tax purposes.
 Fin Hay Realty Co., v. United States, 398 F.2d 694, 694 (3d Cir. 1968)
 Curtis Dubay, Taxation of Debt and Equity: Setting the Record Straight, The Heritage Foundation (September 30, 2015), https://www.heritage.org/taxes/report/taxation-debt-and-equity-setting-the-record-straight.
 For “qualified dividends”, defined as dividend income from a company is domiciled in the U.S. or in a country that has a double-taxation treaty with the U.S. See I.R.S Pub. No. 500, Cat. No. 15093R, 19 (Mar 28, 2019), https://www.irs.gov/pub/irs-pdf/p550.pdf.
 Neil O’Hara, Investment Tax Basics For All Investors, Investopedia (last updated Jun 25, 2019), https://www.investopedia.com/articles/investing/072313/investment-tax-basics-all-investors.asp.