Tax Reform – What matters to financial institutions?
There are several proposed tax law changes making their way through Congress. Here are the ones that matter most to financial institutions:
- HR 1 includes a plan to reduce corporate tax rates to 20% immediately starting in 2018. If the law is enacted by the end of 2018, banks organized as corporations will need to review their deferred tax asset and deferred tax liabilities as of December 31, 2017. This is true for 2017 even if the effective date is 2018, because deferred taxes are a current measure of a bank’s future tax position.
- With a decrease in tax rates, there will likely be a swing in the relative yields of bonds. Ignoring all other factors, taxable bonds may become more attractive relative to tax exempt bonds.
- Certain capital expenditures will be eligible for 100% expensing. This will include not only new property – as was required in the past – but also other property newly placed in service by the taxpayer. Cost segregation studies will be a valuable tool to maximize current tax deductions.
- HR 1 includes a limitation and deferral of the deduction for interest expense that is more than business income for businesses with sales over $25 million. Since net interest income is business income for banks, this will not have much direct impact. But this could have a significant impact on a bank’s lending customers.
- HR 1 currently includes a repeal of the alternative minimum tax (AMT). For banks that slip into an AMT liability because of a large tax-exempt portfolio, this will be a welcome provision if it becomes law.
- HR 1 proposes to limit the deductibility of FDIC premiums for banks with consolidated assets exceeding $10 billion. The deduction would be phased out ratably and eliminated completely for banks larger than $50 billion in assets.
One of the most controversial rules in HR 1 involve the proposed 25% tax rate for pass-through entities, including banks organized as S-corporations. As proposed, the preferential rate would be available for passive investors only. Shareholders who are actively involved in the bank would not have the opportunity to convert their ordinary income to the lower rate, except for a statutory carve-out of 30% of their income. If the rate changes in HR 1 become law in 2018, and if this provision remains, banks may want to reassess the cost benefit of retaining their status as an S corporation.
Obviously, there is much more in HR 1 we have not discussed here, especially regarding individuals. See our Tax Client Advisory here.
At the publishing of this newsletter, the Senate was drafting its plan for tax reform, which called for a delay in the corporate tax rate decrease until 2019, among other changes. Stay tuned.
Our Financial Institutions practice is available to respond to any questions you may have. If you have questions about the content above, please contact your tax client service partner. You may also contact Jeff Harjo, Financial Institutions Practice Lead, at firstname.lastname@example.org or Mallory Taylor, Tax Partner, at email@example.com.