Navigating the FDIC Special Assessment and IRS Deductibility Rules

In November 2023, the Federal Deposit Insurance Corporation (FDIC) implemented a rule to recover losses incurred from protecting uninsured depositors of two failed banks — Silicon Valley Bank and Signature Bank. This recovery comes in the form of a special assessment applied to certain financial institutions.

The first of eight quarterly payments was due on June 28, 2024, covering the period from January 1 to March 31, 2024. Subsequent payments are scheduled quarterly, with the second payment on September 30, 2024, and the third on December 30, 2024. The final payment is due on March 30, 2026.

As of June 30, 2024, the FDIC estimated that 115 banks were subject to the assessment. Banking organizations with less than $5 billion in total consolidated assets are exempt.

IRS Clarification on Deductibility of the Special Assessment

Under §162(r)(1), there is no deduction for the “applicable percentage” of any FDIC premium paid or incurred by the taxpayer. The “applicable percentage” is determined based on the total consolidated assets of the taxpayer.

For taxpayers with total consolidated assets between $10 billion and $50 billion, the applicable percentage is a ratio that increases with the size of the assets. The deduction is entirely disallowed for taxpayers with total consolidated assets of $50 billion or more. Thus, financial institutions with less than $10 billion of total consolidated assets are not subject to the deduction disallowance of §162(r).

In November 2024, the IRS clarified through Chief Counsel memo AM 2024-003 that the deductibility of the FDIC special assessment is not subject to the limitations set forth in §162(r). The IRS also held the special assessment differs from an FDIC premium, as it is not a prepaid asset and does not create an insurance contract with cash value. Therefore, the special assessment is not subject to capitalization.

Further, the IRS stated the liability to pay the FDIC special assessment imposed under the Final Rule is fixed under the all-events test of §461 in Year 1 (2023), and in that year the liability has been determined with reasonable accuracy. However, economic performance for the special assessment liability will generally not occur until the liability is paid.

And finally, the IRS argued the liability to pay the FDIC special assessment imposed under the Final Rule does not qualify for the recurring item exception of §461(h)(3). Thus, the liability is incurred and deductible in the taxable year in which the liability is paid.

Next Steps for Financial Institutions

Understanding the FDIC special assessment and its implications for your institution requires careful attention to the details of the rule and its interplay with tax law. Our team has the expertise to guide you through the nuances of this assessment and its impact on your organization’s financial and tax strategies. Whether you have questions about compliance, timing, or broader financial service topics, we can help.