On September 29, 2009, the FDIC announced a proposed rule that would require institutions to prepay on December 30, 2009, an estimated quarterly risk-based assessments for the 4th quarter of 2009 and for all 2010, 2011, and 2012. For a synopsis, see our prior summary of the proposed rule. Comments to the proposed rule are due by October 28, 2009.
Tax Treatment of Prepayments
The general rule is that prepayments that benefit more than one taxable period cannot be deducted in full, but must be deducted over the periods for which the benefits are obtained. Thus, a payment of 3 years worth of insurance premiums cannot be deducted in a single tax year regardless of whether the institution is an S corporation or a C corporation. The rule also is the same for cash method taxpayers, with one limited exception. A cash method taxpayer can prepay up to 12 months of expenses and claim a deduction when paid. For example, an institution could prepay its 2010 insurance premiums in December of 2009 and claim the deduction in 2009. However, if the institution prepaid 3 years worth of insurance premiums in 2009, it could not deduct the entire amount paid.
Requests for Exemption Due December 1
The FDIC plans to exercise its supervisory discretion to exempt individual institutions from the prepayment requirement where the prepayment would adversely affect the given institution’s safety and soundness. The proposed rule also provides that an institution may apply to the FDIC for exemption if prepayment of the assessments would significantly impair its liquidity or would otherwise create significant hardship. According to the proposed rule, requests for exemption from the prepayment requirement are due on or before December 1 and must contain:
- a full explanation of the institution’s need for the exemption including supporting documentation, such as current financial statements and cash flow projections;
- a description of management’s plans to correct the circumstances that caused the inability to pay the assessment; and
- any other relevant information that the FDIC deems appropriate.
The FDIC expects that few exemptions by application would be necessary. However, for an institution faced with the prospect of requesting an exemption, the FDIC’s expectation is of little consolation.