In December, Treasury and the IRS issued proposed regulations updating the standard for determining when a debt instrument held by certain banks and insurance regulated entities will be conclusively presumed to be worthless for tax purposes.

Under Section 166, taxpayers can generally deduct a debt that has become “worthless” or “partially worthless” to the extent such debt is charged off within the taxable year based on a facts and circumstances analysis, including the financial condition of the debtor and the value of any collateral. Current regulations permit certain regulated financial companies, such as banks and insurance companies, to conclusively presume that a debt is worthless when such debt is charged off pursuant to certain regulatory accounting rules specifically identified in the regulations. In recent years, taxpayers have noted that some of these regulatory accounting rules are no longer valid or practicable and have urged the government to update the regulations to reflect current methods.

The proposed regulations, which taxpayers may rely upon until the regulations are finalized, permit a regulated financial company or a member of a regulated financial group to conclusively presume that any amount of charged-off debt is worthless when the debt is charged off in accordance with Generally Accepted Accounting Principles ("GAAP") or certain other accounting practices widely used within these industries. Thus, the proposed regulations are written more broadly and more closely tie the tax write-off to actual regulatory practices, an approach taxpayers will welcome.