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STEP ONE - MAKE THE CALL

Edith Snow
letter from its regulator confirming the while it’s still open under the typical If not, the associated risk of IRS adjust- 817-676-3316
regulatory standards were followed in its three-year statute of limitations could be ments under exam should be weighed.
most recent exam. Accounting for bad the last opportunity to apply this option. If the current method results in an James Walsh
debt deductions through the conformity An election isn’t required to be formally undesirable outcome when CECL is 281-794-0065
election is a tax method of accounting. made on a filed return. However, if audit- applied—which is likely—what can be
Therefore, a change from or to a differ- ed, an examiner could request a com- done to help mitigate the loss of the tax Celena Ivanitch
ent method requires filing Form 3115, pleted certification statement, which is deduction? First, determine the most 512-787-2164
Application for Change in Accounting provided within the directive in the form advantageous method for your bank. If
Method. This can be beneficial as it allows of a fillable template. Once adopted, the the conformity election or LB&I direc- Richard Grimes
for a catch-up of deductions in the year directive “election” doesn’t appear to be tive results in the deduction of addition-
of the change and provides audit protec- revocable. al losses, consider converting to those 469-543-9337
tion on that specific change. As described above, there are multi- methods and taking catch-up deductions
Bad Debt Method #4: The Reserve ple tax methods available for determin- on an amended or upcoming tax return.
Method ing the amount and timing of bad debt Second, consider accelerating other
deductions. A simplistic view of CECL’s deductions that may be available, but not
Banks with $500 million or less in tax effect would be to take the increase previously considered. Examples include:
assets may use the reserve method in the allowance and reverse it for tax
(also called the experience method) to purposes. While this is necessary to prop- • Accelerating the deduction for quali-
determine their loss deductions under erly model and evaluate CECL’s effect, fying prepaid expenses by deducting
IRC §585. There are two available cal- opportunities to mitigate the unwant- certain short-term prepaid items in the
culations described in IRC §585(b)(2), ed result of a GAAP-only deduction year paid
and the most beneficial result is applied. shouldn’t be overlooked. Evaluate the • Deducting loan origination costs in the
Both calculations look back to prior-year bad debt method being used for tax pur- year paid
reserves, and they generally result in poses, and open a dialogue with your tax • Paying compensation and related in-
more favorable tax deductions, e.g., team and/or advisors to determine if the centives early and/or amending relat-
smaller tax addbacks, than the methods method is one of the “approved” options. ed agreements to fix accruals at year-
available to larger banks. end
continued pg. 35
Bad Debt Method #5: Large
Business & International Directive

In 2014, the IRS issued a directive to
its Large Business & International (LB&I)
examiners to provide guidance on how
they should treat bad debt deductions
through LB&I-04-1014-008. This result-
ed in yet another alternative method
for banks to follow. While the directive
isn’t law, it does carry weight since its
very purpose is to reduce disagreements
between the IRS and banks. The direc-
tive, like the conformity election, gener-
ally allows for loss deductions for partial
and wholly worthless debts to follow
those reported for GAAP and regulatory
purposes. The LB&I directive, however, Artful
doesn’t require the express consent let-
ter or the filing of Form 3115 like the con-
formity election. The election is made by expertise.
running the applicable positive or nega-
tive tax differences between the bank’s
current method and the LB&I directive,
e.g., GAAP method, through an original
or amended 2010 to 2014 return. This
means amending a bank’s 2014 return Everyone needs a trusted advisor. Who’s yours? 713.499.4600 | bkd.com

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