Revenue Ruling 83-66: Business Expense Deductions
Revenue Ruling 83-66 clarifies the tax treatment of mandatory assessments to state guaranty funds, defining them as deductible ordinary business expenses.
The Internal Revenue Service (IRS) issues revenue rulings to interpret tax law for specific factual situations. Revenue Ruling 83-66 addresses the proper tax treatment for payments that property and casualty insurance companies are compelled to make to state-mandated guaranty funds. This guidance clarifies how these specific payments should be classified for federal income tax purposes.
The Scenario Addressed by the Ruling
Revenue Ruling 83-66 examines a situation where a state establishes a guaranty association or fund to cover the policyholder claims of property and casualty insurance companies that have become insolvent. The state mandates that all insurance companies licensed to write specific lines of insurance, such as auto or homeowners insurance, must become members of this association.
As a condition of doing business in the state, these member companies are required to make payments, often called assessments, to the guaranty fund. The amount of these assessments is typically calculated based on the insurer’s share of the market, determined by the volume of premiums written in the state for the covered lines of insurance.
The Ruling’s Conclusion on Deductibility
The conclusion of Revenue Ruling 83-66 is that these mandatory payments are deductible as ordinary and necessary business expenses under Internal Revenue Code Section 162. The IRS’s reasoning focuses on the primary purpose of the payments, which is to protect and promote the business interests of the contributing insurance companies by ensuring market stability and maintaining public confidence. When one insurer fails, the fund prevents negative consequences that could harm all companies operating in that market.
This treatment is distinguished from state taxes, as the ruling clarifies these assessments do not qualify as deductible taxes under Internal Revenue Code Section 164. The distinction lies in the use of the funds. While taxes are for public purposes, these assessments are for the direct benefit of the contributing members of a specific industry, making them a cost of doing business.
Applying the Deduction
An insurance company claims the full amount of the assessment as a business expense deduction on its annual federal income tax return. For property and casualty insurers, this deduction is reported on Form 1120-PC, the U.S. Property and Casualty Insurance Company Income Tax Return. The payment is entered as part of the company’s overall business deductions, which reduce its taxable income.
The deduction is claimed in the year the payment is made. The company’s accounting records should clearly document the payment to the state guaranty association to substantiate the deduction in case of an IRS examination.