Proposed Regulations Clarify Bad Debt Deductions for Regulated Financial Companies

This blog was authored by my colleague Trevor Huisman, a tax principal within our financial services group.

On December 27, 2023, the IRS and Treasury released proposed regulations (REG-121010-17) that would update the standard used to determine when a debt instrument held by a regulated financial company or group would be considered worthless.

The proposed regulations apply to charge offs, from the allowance for credit losses, made by a regulated financial company and members of regulated financial groups on its applicable financial statement. The proposed regulations allow the regulated financial company or group to use an accounting method, either generally accepted accounting principals (GAAP) or statements of statutory accounting principles (SSAP), to apply a conclusive worthless determination on a debt instrument held by the entity.

Taxpayers may rely on the proposed regulations under section 1.166-2(d) for charge-offs made on their applicable financial statement that occurs in tax years ending on or after December 28, 2023.

Comments on the proposed regulations, as well as requests for a public hearing, must be received by February 26, 2024.

How can we help?

CLA’s Financial Services Group is filled with experienced professionals. Please Contact Us to assist your institution with tax planning.