Editor: Mary Van Leuven, J.D., LL.M.
The law known as the Tax Cuts and Jobs Act (TJCA), P.L. 115-97, added Sec. 162(r) to the Internal Revenue Code, limiting the amount larger banks may deduct for certain premiums paid pursuant to an assessment by the Federal Deposit Insurance Corporation (FDIC). The change applies to tax years beginning after Dec. 31, 2017. Before the TCJA, these premiums were deductible without limitation as an ordinary and necessary business expense. Although it may appear simple on its face, Sec. 162(r) is worthy of additional examination.
For competitive reasons or to meet regulatory requirements, banks carry FDIC insurance for their depositors. To maintain its FDIC insurance, an institution must make periodic premium payments into the deposit insurance fund. (Credit unions have similar premiums assessed by the National Credit Union Administration to fund the National Credit Union Share Insurance Fund, which insures their depositors' accounts. Credit unions are not affected by the new deduction disallowance because they do not pay FDIC premiums.)
Sec. 162(r) disallows a deduction for the "applicable percentage" of any FDIC premium. Sec. 162(r)(4) defines the term "FDIC premium" as any assessment imposed under Section 7(b) of the Federal Deposit Insurance Act (FDIA), P.L. 81-797. These assessments are the premiums charged by the FDIC to provide the $250,000 federal guarantee to account holders on their deposits in FDIC-insured accounts. The FDIC also collects different obligations. For example, it served as the collection agent for the Financing Corporation (FICO). FICO previously assessed FDIC-insured banks in order to make interest payments on 30-year FICO bonds issued between 1987 and 1989 to recapitalize the Federal Savings and Loan Insurance Corporation. The final FICO assessment was made on March 29, 2019. FICO's assessment authority (which is separate from the FDIC's authority to assess premiums for deposit insurance) to collect funds from FDIC-insured institutions to pay interest on FICO bonds is found in Section 21 of the Federal Home Loan Bank Act, P.L. 72-304, not in Section 7 of the FDIA. Therefore, FICO assessments are not subject to the Sec. 162(r) deduction disallowance for 2018 and 2019 (their final years).
The applicable percentage of FDIC premiums disallowed is determined on a sliding scale, with the percentage increasing as total consolidated assets increase, beginning with taxpayers having "total consolidated assets" (as defined in Sec. 162(r)(5) and discussed below) of greater than $10 billion. There is no disallowance for taxpayers with total consolidated assets of $10 billion or less; they can continue to deduct the full amount of FDIC premiums.
For taxpayers with more than $10 billion in total consolidated assets, the applicable percentage is the ratio that (1) the excess of total consolidated assets over $10 billion bears to (2) $40 billion. The ratio, however, cannot exceed 100%. For example, the applicable percentage for a taxpayer with $45 billion in total consolidated assets would be $35 billion (the excess of total consolidated assets over the $10 billion threshold) divided by $40 billion, or an 87.5% disallowance. A taxpayer with $50 billion in total consolidated assets would have a 100% disallowance (computed as $40 billion, the excess of total consolidated assets over the $10 billion threshold, divided by $40 billion). This means no deduction may be claimed for FDIC premiums paid or accrued by taxpayers with total consolidated assets of $50 billion or greater.
The importance of determining total consolidated assets is obvious. Sec. 162(r)(5) defines the term "total consolidated assets" by cross-referencing Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), P.L. 111-203, where the same term is used but not clearly defined. Regulations issued under the Dodd-Frank Act (12 C.F.R. §246.4), however, indicate that total consolidated assets for purposes of the Dodd-Frank Act (and, hence, for purposes of Sec. 162(r)) are equal to total consolidated assets as reported on Federal Reserve Bank Form FR Y-9C, Consolidated Financial Statements for Holding Companies, or an equivalent report filed with the regulator. Form FR Y-9C parallels the Reports of Condition and Income (commonly referred to as a "call report") that banks file with the FDIC. If Form FR Y9-C is not filed, then the amount of total consolidated assets for purposes of the deduction limitation under Sec. 162(r) is the amount reported on an equivalent regulatory report, which may be a call report. Importantly, the amount of total consolidated assets is based on the amount reported on the financial institution's regulatory report rather than the assets reported on the tax return or audited financial statements.
Under a special aggregation rule in Sec. 162(r)(6), members of an "expanded affiliated group" of related entities are treated as a single taxpayer. For purposes of the deduction limitation, an expanded affiliated group is "an affiliated group as defined in [Sec.] 1504(a)," but (1) substituting "more than 50 percent" for "at least 80 percent"; (2) excluding the exceptions for insurance companies and foreign corporations provided in Secs. 1504(b)(2) and (3); and (3) adding partnerships and any other entities controlled by members of the group (Sec. 162(r)(6)(B)). This expanded affiliated group may not be the same group of entities included in either the taxpayer's regulatory reports or the taxpayer's consolidated federal income tax return.However, the amount of total consolidated assets for an expanded affiliate group would appear to only include those balances reported on the members' regulatory reports. Therefore, assets owned by expanded affiliated group members that are not reflected in the regulatory report balances would not be reflected in the total consolidated assets balance.
The hidden complexities of Sec. 162(r) do not end here. Total consolidated assets are determined as of the close of a tax year (Secs. 162(r)(2) and (r)(3)(A)(i)). Although not explicit in Sec. 162(r)(3)(A)(i), this rule appears to include the last day of a short tax year but does not specify how to compute total consolidated assets if a short tax year does not end on the same date as the date for filing the applicable regulatory report. Congress, having chosen to piggyback the determination of total consolidated assets off a regulatory report, does not appear to have intended that a special computation be required off-cycle. One approach might be to make this determination as of the date of the most recent regulatory report. Using this approach, total consolidated assets would be determined, in the case of a short tax year, as of the end of the most recent period (based on the filing frequency of its regulatory report) ending on or before the close of the short tax year. It would be helpful if the IRS confirmed, through regulations or other guidance, the timing of the determination of total consolidated assets in the case of a short tax year.
As a result of the addition of Sec. 162(r) to the Internal Revenue Code by the TJCA, larger banks will be limited in their ability to deduct FDIC premiums. Until guidance is issued, taxpayers may continue to face some uncertainty with respect to the application of Sec. 162(r).
Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.
For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with KPMG LLP.
These articles represent the views of the author(s) only, and do not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.