A Closer Look at How Potential Tax Changes Could Affect Your Financial Institution
Author: Lance Davis
The political climate in Washington, D.C., along with recent remarks from congressional leaders and White House officials, seem to indicate the environment is ripe for tax change in 2017 and beyond. Even so, there are differing opinions about these major issues:
- When legislative language would be drafted and introduced
- How the legislation will read
- If there will be efforts to garner bipartisan support
- If the reform legislation would be retroactive to the beginning of 2017
Resolving the many differences within the current political agenda may make tax reform difficult to accomplish.
Though there have been many tax reform proposals, those put forth by House Republicans and President Trump are most likely to heavily influence tax change with Republicans in control of both Congress and the White House. If we see tax reform, the House Committee on Ways and Means Better Way for Tax Reform Blueprint (House Blueprint) is a likely starting point. Further, recent statements from House Speaker Paul Ryan and House Committee on Ways and Means Chairman Kevin Brady indicate these efforts may already be underway. Although the two proposals provide insight into how tax reform may look, they aren’t yet fully developed—and legislative language will be necessary to understand how the concepts would operate. Read “Election Results May Lead to Tax Changes in the New Year” to learn more about these proposals and how they compare to current tax law.
Despite the facilitative political environment, it’s difficult to predict the possibility or substance of tax reform without detailed proposals given plenty of differing opinions. Even so, possible tax reform can affect you, and understanding potential outcomes is important for your tax planning strategy.
To help you navigate uncertainty surrounding tax reform, here are some key areas and planning considerations in the Financial Services industry that BKD’s tax professionals will be watching for in possible tax reform legislation.
- A tax rate reduction will affect a bank’s investment decisions related to tax-exempt loans and securities, tax credit investments and bank-owned life insurance.
- A decrease in tax rates will adversely affect the tax-equivalent yield on current tax-exempt investments. It also will affect the pricing of the investments. Banks should consider interest rate adjustment clauses on tax-exempt investments in the interim until we know what the new legislation will include. Many banks will likely take a wait and see approach with their investment portfolio.
- A tax rate reduction will affect a bank’s deferred tax asset/liability through how and when the deferred tax asset (DTA)/deferred tax liability’s (DTL) revaluation is recognized.
- A bank’s DTA isn’t necessarily a function of the institution’s size. A tax rate reduction’s long-term effect is welcome news to banks. However, those with a significant DTA in relation to the size of the institution will take longer to recover from the initial revaluation. There’s some uncertainty as to how the revaluation will be recognized on the financial statements. This accounting question will be driven by tax legislation. This creates planning opportunities to accelerate timing deductions and reduce the DTA through automatic accounting method changes.
- Tax reform related to pass-throughs will affect S corporation banks through possible relief for community banks with greater than 100 shareholders, a possible new pass-through tax rate and the effect of proposed valuation regulations on gifting of closely held banks.
- Most eligible institutions have run the S corp versus C corp calculations many times. Within a tax system where corporate and individual rates are significantly lower, these calculations must be revisited within different tax rate scenarios. There’s a valid financial reason banks elected to be taxed as S corps. However, that could change if tax legislation results in new rules.
While it’s still too early to predict the timing and substance of possible tax reform, reviewing your tax plan with your BKD advisor on an ongoing and regular basis will help prepare you for potential tax changes.