1120-US: Calculating the bad debts deduction under the experience method (FAQ)

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Question

How does UltraTax/1120 calculate the bad debts deduction under the experience method?

Answer

Enter the net charge-offs, total loans outstanding, and reserve information in Screen BadDebt in the Income & Deductions folder. UltraTax/1120 uses this information to complete the Experience Method for Bank Bad Debts Worksheet and the Analysis of Bad Debts Reserve Worksheet.

Under the experience method, a bank calculates the ratio of total bad-debt charge-offs for its most recent six taxable years, including the current-taxable year (adjusted for recoveries of bad debts during such period), to the sum of loans outstanding at the close of each such six years.

The ratio calculated is applied to loans outstanding at the close of the current-taxable year and the result constitutes the permissible reserve balance. The addition for a taxable year is the amount required to bring the reserve to the permissible balance.

Related topic: 1120-US: Financial institution FAQs

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