Executive Summary: The much-debated tax reform proposal currently under consideration may have unexpected impacts to many financial institutions. As drafted, both the House and Senate bills include a corporate rate reduction for federal income taxes from 35% to 20%. Generally, the proposals are favorable to business taxpayers including the banking industry, as the lower corporate tax rate would typically enhance future earnings and capital for most banks. Other significant provisions include:
- Full and immediate expensing (up to $2M) on investments in depreciable property other than structures.
- Net operating loss utilization will be limited each year to 90% of taxable income.
- Alternative Minimum Tax is repealed.
Financial Statement Impact: Because of the corporate rate reduction, the initial change in the deferred tax asset (“DTA”) or liability should be reflected in income in the quarter of enactment. If the legislation is passed by the end of this calendar year and is effective for 2018, there should be a current adjustment to the accumulated deferred tax that will be revalued at the lower rates for 2018. The financial statement impact of the deferred tax adjustment to account for the reduced corporate tax rate will vary among banks depending on the bank’s tax profile. Caution-Banks with large deferred tax assets may need to book a significant tax expense for 2017 or 2018 depending on the date of enactment.
Potential Regulatory Capital implications of Reduced Corporate Tax Rates: Banks should consider the impact of a DTA write-down on capital, particularly if such DTA is fully recognized for regulatory purposes.
Various Other Potential Collateral Effects: The lower tax rates may reduce the value of tax-exempt investments and loans. The proposed legislation contains a limitation on interest deductions by C corporations. Consideration should be given to the impact of this net interest deduction limitation on businesses. There could be a shift – businesses may move toward leasing vs. debt financing.
Planning for Corporate Tax Rate Reduction: You may want to consider some tax planning ideas, some that would need to be implemented before year end. Please contact our office to discuss in more detail. Even if you don’t make any actual tax planning moves before tax reform is effective, you should consider the impact tax reform may have on current business decisions with long-term economic effects.
If you have questions or concerns, please reach out to your trusted Pugh CPAs advisor!