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Question

How is the deduction for bad debts determined for financial institutions?

Answer

Banks (other than large banks) can maintain a bad debt reserve and calculate the amount of bad debt reserves and bad debt reserve additions for losses on loans under the special rules of IRC section 585.

This deduction for a reasonable addition to a reserve for bad debts is allowed instead of any bad debt deduction under IRC section 166(a). However, the addition to bad debt reserves cannot exceed the addition to the reserve for losses on loans under the "experience method."

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