OAR 150-317-0370: Bad Debt Reserve of Financial Institutions that Have Changed From Reserve Method to Specific Charge-off Method

(1) For tax years beginning on or after January 1, 1987, Oregon has adopted the federal provisions for treatment of bad debts of financial institutions provided in Section 585(c) of the Internal Revenue Code (IRC). Financial institutions considered large banks, defined in IRC 585(c)(2), must recapture the balance in their reserve for bad debts over a four-year period unless they elect the federal “cut-off” method. (a) The recapture provisions of IRC 585(c)(3) shall be applied to the ending reserve balance calculated for Oregon tax purposes for the 1986 tax year. (b) For each of the four recapture years, an Oregon addition modification shall be made if the Oregon reserve recaptured exceeds the federal reserve recaptured. An Oregon subtraction modification shall be made if the federal reserve recaptured exceeds the Oregon reserve recaptured. Example: Lending Corp., a calendar year filer, has a bad debt reserve of $5,000,000 for federal and $3,000,000 for Oregon tax purposes on December 31, 1986. Lending Corp. qualifies as a large bank. It elects to recapture 10 percent of the bad debt reserve as income on its 1987 federal return. An Oregon subtraction modification of $200,000 is calculated as follows: [Table not included. See ED. NOTE.] (c) Financially troubled banks don’t have to recapture existing bad debt reserves as long as their nonperforming loans exceed seventy-five percent of the average of their equity capital for the year. (2) Oregon also adopted the cut-off method provided under IRC 585(c)(4) for tax years beginning on or after January 1, 1987. If the financial institution elects the cut-off method, the ending balance of the reserve for bad debts for the 1986 tax year shall not be recaptured. Instead, bad debts in tax years after 1986 shall be charged to the reserve rather than deducted from income. When the entire reserve has been depleted, bad debts shall be deducted as they occur. (a) The provisions in IRC 585(c)(4) shall be applied to the ending reserve balance calculated for Oregon tax purposes for the 1986 tax year. (b) The ending balance of the reserve for bad debts as of December 31, 1986, may be greater for federal purposes than it is for Oregon. If so, the Oregon reserve will be depleted before the federal reserve. An Oregon subtraction modification shall be made when the Oregon deduction for bad debts exceeds the federal deduction for the tax year. Example: Large Bank, Inc., elected the cut-off method of treating its reserve for bad debts, starting in 1987. The reserve balance on January 1, 1991, was $100,000 for federal purposes and $50,000 for Oregon purposes. During 1991, $150,000 of bad debts were written off. An Oregon subtraction modification of $50,000 is calculated as follows: [Table not included. See ED. NOTE.] (c) The ending balance of the reserve for bad debts as of December 31, 1986, may be greater for Oregon purposes than it is for federal. If so, the federal reserve will be depleted before the Oregon reserve. An Oregon addition modification shall be made when the federal deduction for bad debts exceeds the Oregon deduction for the tax year. [Publications: The publication(s) referred to or incorporated by reference in this rule is available from the Department of Revenue pursuant to ORS 183.360(2) and 183.355(6).] [ED. NOTE: To view attachments referenced in rule text, click here to view rule.]