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#1655785 - 01/25/12 06:05 PM Definition of Interest for Tax Reporting
Getting_Grayer Offline
100 Club
Joined: Oct 2007
Posts: 192
USA
I have a question concerning whether this premium is considered interest or not. We did a refer-a-friend program paying $50 to both the referrer and the referee. The details were a checking account had to be opened and either a direct deposit had to be made or 3 debit card transactions in order to earn the $50. A minimum deposit of $25 was required to open the account, but no minimum balance or time frame to keep the account open. In the definition of interest in the FDIC Rules and Regulations it states:

§330.101(e) Notwithstanding 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.

Since the premium was not “directly or indirectly related to or dependent on the balance” in the account, or the duration of the account but on the customer’s use, I am not sure if the definition applies. We are trying to determine this for both IRS reporting as well as FDIC insurance issues.

Thank you for your help.

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#1656140 - 01/25/12 11:21 PM Re: Definition of Interest for Tax Reporting Getting_Grayer
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 79,926
Galveston, TX
The FDIC's definition of interest is meaningless when determining interest reporting for IRS purposes. You are looking for this document:

http://www.irs.gov/pub/irs-irbs/irb00-28.pdf
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#1658559 - 01/31/12 07:17 PM Re: Definition of Interest for Tax Reporting Getting_Grayer
John Burnett Offline
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John Burnett
Joined: Oct 2000
Posts: 39,793
Cape Cod
The referrer is clearly not receiving interest. You should keep track of incentive payments to referrers and report under the 1099-MISC rules if a user receives $600 or more in such payments (combined with other 1099-MISC payments) in a year.

As to the FDIC's definition of interest, it only makes a difference with regard to whether a demand deposit account will be disqualified for the unlimited deposit insurance coverage provision in §330.16, and that provision is currently scheduled to sunset on 12/31/12. If you are paying the $50 to a new customer only if there are the required direct deposits or debit card transactions, I think you've satisfied the exception contained in §330.101(e), and you won't be considered to be paying interest by the FDIC.

The IRS ruling is another matter. The FDIC's interest definition may be modeled on the IRS rule, or vice versa, but the FDIC doesn't reach over into IRS territory to tell them how to interpret the Internal Revenue Code.

The IRS has not drawn a sharp line in its definition of interest, and I won't offer you tax advice. I will say that you probably have a strong argument that the $50 payments are not for the use of money (since you would not pay them if the customer didn't make the required transactions, regardless of the balance or duration of that balance). But if the $50 doesn't get reported on a 1099-INT, it would fall under the 1099-MISC rules, assuming the threshold amount for reporting is reached. And technically, the customer should report it as income, regardless of whether you report it on any sort of 1099 form.


Last edited by John Burnett; 01/31/12 07:19 PM.
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#1658568 - 01/31/12 07:24 PM Re: Definition of Interest for Tax Reporting Getting_Grayer
Getting_Grayer Offline
100 Club
Joined: Oct 2007
Posts: 192
USA
Thank you very much!

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