DEBTS by electing to be treated as “securities dealers” for US tax purposes.

The IRS said in an interesting field service advice recently that an owner of acute care hospitals and nursing homes could elect to be treated as a “securities dealer” because it regularly held securities — or debts — from customers. Under US tax laws, a company can take a deduction for worthless debts. It used to be able to deduct a percentage of the outstanding debts each year as an addition to a reserve for bad debts. However, in 1986, Congress changed the rules to require that a company wait until the year a debt actually becomes worthless before deducting it. The idea was to stop deductions based merely on additions to a reserve.

A company that elects treatment as a “securities dealer” marks its receivables to market at the end of each year. This has the same effect as taking deductions based on a reserve allowance.

The IRS remarked in the field service advice that “it has been suggested that [this] implicitly permits taxpayers to circumvent the prohibition against reserves for bad debt.” However, it allowed just that for the nursing home owner.