Academic journal article ABA Banking Journal

Mailbox: Deposit Premiums and the Tax Man. (Compliance Clinic)

Academic journal article ABA Banking Journal

Mailbox: Deposit Premiums and the Tax Man. (Compliance Clinic)

Article excerpt

Q. If a bank offers a onetime $50 payment to a depositor as an incentive for initiating direct deposits to the account, is the premium subject to 1099-INT reporting?

A. Yes. There are two considerations relating to this question. Section 217.101 of Regulation Q states: "(a) Section 19(i) of the Federal Reserve Act and [ss] 217.3 of Regulation Q prohibits a member bank from paying interest on a demand deposit. Premiums, whether in the form of merchandise, credit, or cash, given by a member bank to a depositor will be regarded as an advertising or promotional expense rather than a payment of interest if: (1) The premium is given to a depositor only at the time of the opening of a new account or an addition to an existing account.

"(b) Notwith-standing paragraph (a) of this section, any premium that is not, directly or indirectly, related to or dependent on the balance in a demand deposit account and the duration of the account balance shall not be considered the payment of interest on a demand deposit account and shall not be subject to the Limitations in paragraph (a) of this section. …

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