The IRS has issued procedural guidance (Rev. Proc. 2024-30) for regulated financial companies that want to use the Allowance Charge-off Method described in the proposed regulations under Section 166.
Background
In general, Section 166(a) permits a deduction for any debt that becomes worthless within a taxable year, and the regulations thereunder have provided two rules for determining when a debt is worthless. the IRS released proposed regulations under Section 166 on Dec. 28, 2023, that provide regulated financial companies a new, optional, “Allowance Charge-off Method.” For this purpose, the proposed regulations define the term “regulated financial company” to include, among others, a bank holding company that is a domestic corporation, a covered savings and loan holding company, a national bank and a regulated insurance company.
Generally, the Allowance Charge-Off Method allows a taxpayer to claim a bad debt deduction to the extent a debt is charged-off from the allowance for credit losses and recorded in applicable financial statements in accordance with U.S. GAAP or as required to be provided to its applicable reporting agency. As noted in the prior guidance, the revenue procedure does not answer all open questions from the proposed regulations. See our full article on the proposed regulations.
Change in accounting method provided
Rev. Proc. 2024-30 provides an automatic method change for eligible taxpayers that want to begin to use the Allowance Charge-off Method. The procedures are applicable to tax years ending after Dec. 28, 2023, which means that a calendar year-end taxpayer could use the method on 2023 tax returns.
Generally, any regulated financial company or member of a regulated financial group as defined in the proposed regulations is eligible to use the procedures. However, if a bank wants to change from the Section 585 reserve method to the Allowance Charge-off Method, it may not do so under these automatic procedures, but rather through the non-automatic procedures under Rev. Proc. 2015-13.
The automatic procedures provide a limited waiver of the five-year scope limitation in Section 5.01(1)(f) of Rev. Proc. 2015-13 for taxpayers that request the change on the first or second year ending after Dec. 28, 2023. This provides flexibility to taxpayers that may have recently changed their method of accounting for bad debts, prior to the release of Prop. Treas. Reg. Sec. 1.166-2(d).
The change is made on a cut-off basis and applies only to charge-offs on or after the beginning of the year of change. Accordingly, a Section 481(a) adjustment is neither permitted nor required, and taxpayers must continue to use their prior method of accounting to determine when an amount is worthless if it was charged off prior to the year of change.
Lastly, if a taxpayer has previously made a conformity election under Treas. Reg. Sec. 1.166-2(d)(3) and changes its method of accounting under this revenue procedure, it is treated as having revoked its conformity election.
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