Treatment of Interest Income of Rural Banks

January 24, 1978 REVENUE MEMORANDUM CIRCULAR NO. 007-78 SUBJECT : Treatment of Interest Income of Rural Banks TO : All Internal Revenue Officers and Others Concerned Presently, Central Bank policies, insofar as the examination of the books of accounts of rural banks for general banking act purposes is concerned, allow rural banks to consider interest on loans as income realized only when actually received notwithstanding the fact that the rural banks may have adopted the accrual method of reporting income and expense. Conversely, if the rural bank has adopted the cash method of reporting income and expense, Central Bank allows the accrual of interest expense on deposits and loan as an expense in computing its income. To harmonize our position with the Central Bank policies, the following rules are hereby promulgated: (1) Rural banks, which have adopted the accrual basis of reporting income and expense, may be allowed to reflect interest on loans receivable as income only when actually received. (2) Rural banks, which have adopted a cash basis of reporting income and expense, may be allowed to accrue interest on deposits and loans payable as an expense in the year of accrual. These practices shall be allowed as exceptions to the rule prescribed in Section 168 of the Income Tax Regulations, provided that these practices are used consistently from year to year and will clearly reflect income. All internal revenue officers and others charged with the enforcement of the internal revenue laws are hereby enjoined to be guided accordingly. aisa dc CONRADO P. DIAZ Acting Commissioner of Internal Revenue TAN-D2567-D1025-A-2