Congress is talking about the next round of stimulus, and the Treasury and Internal Revenue Service are releasing details regarding the recovery rebate checks for individuals.
With so many pieces of legislation and new regulations, it can be difficult for financial institutions to keep track of items that apply to them.
Here is a summary of seven tax considerations that can apply to financial institutions.
Following is a summary of some tax considerations from the CARES Act that may apply to financial institutions.
Qualified Improvement Property (QIP) glitch fixed retroactively
The CARES Act corrects the language error that stems from the Tax Cuts and Jobs Act (TCJA). The language glitch from the TCJA prevented many interior building renovations from enjoying the significant benefit of 100% bonus depreciation. Instead, under the TCJA, interior building improvements were required to be depreciated straight-line over a 39-year tax life. The QIP glitch fix is particularly impactful for S corporations because they often choose bonus depreciation over Section 179 due to potential shareholder issues or limitations with Section 179.
If a financial institution remodeled the interior of its building subsequent to TCJA passage and is currently depreciating it over 39 years, or if an institution is in the process of renovating or considering renovating, this is an outstanding tax opportunity. Filing a change in accounting method (Form 3115) will allow a cumulative “catch-up” depreciation deduction in lieu of amending prior-year tax returns (for those with post-TCJA QIP currently depreciating over 39 years).
Student loan repayment benefit
Financial institutions should consider making this tax benefit part of their talent attraction and retention strategy for 2020. The tax law prior to the act allowed an employer to pay up to $5,250 in “educational assistance” to an employee tax free. The act allows the $5,250 to include principal and interest payments on an employee’s student loan paid by the employer on the employee’s behalf. The inclusion of principal and interest payments is for 2020 only (and for payments made after the act’s passage).
Credit for prior year minimum tax liability
TCJA repealed the Alternative Minimum Tax (AMT) for corporations and provided for refundable AMT credits over a multi-year period. The CARES Act accelerates remaining AMT credit usage to the tax year beginning in 2019. Alternatively, taxpayers can elect to claim the entire refundable AMT credit in tax years beginning in 2018, presumably via an amended tax return.
Delayed payment of employer taxes
Employers and self-employed individuals can defer their payment of the employer share of social security (6.2%) or self-employment tax (for amounts attributable to the period from the date of enactment through December 31, 2020). The deferred payroll taxes are delayed in such a manner that 50% is required to be paid by December 31, 2021, and 50% is required to be paid by December 31, 2022.
Net Operating Loss (NOL) modification
TCJA limited the ability to use NOLs. Under TCJA, NOLs cannot be carried back, but instead are carried forward indefinitely and can only offset 80% of taxable income. The CARES Act significantly changes the treatment of NOLs that are generated in 2018, 2019, and 2020. For NOLs arising in these tax years, the NOL can now be carried back for a period of 5 years, and the 80% NOL limitation is removed for these tax years. A special rule applies to NOLs generated by fiscal taxpayers that started in 2017 and ended in 2018 — these can be carried back 2 years instead of 5 years.
Change in federal due dates
IRS Notice 2020-18 (and 2020-23) extended the federal filing due date for most taxpayers to July 15, 2020. The notice also extends the federal payment due dates for many taxpayers for both 2019 taxes as well as the first two (as of this writing) 2020 estimated tax payments to July 15, 2020. This extension also potentially impacts S corporation tax distributions that are paid to shareholders for their individual estimated tax payments. Some states follow the federal due date changes, while others do not.
Tax allocation agreements
This topic is not related to the CARES Act but is an important tax development that impacts tax allocation agreements. In a recent bankruptcy case involving a bank, its holding company, and the FDIC as receiver, the Supreme Court vacated an appeals court decision that found a tax refund due from a consolidated tax return generally belongs to the company that created the tax losses forming the basis of the refund. The Supreme Court’s decision rejects the 47-year-old precedent known as the Bob Richards rule, which provides that in the absence of a tax allocation agreement, a tax refund on a consolidated tax return belongs to the group member responsible for generating the refund.
In Rodriguez v. Federal Deposit Insurance Corporation, the issue was whether the bank or the parent holding company owned the tax refund during bankruptcy proceedings. Rodriguez was the trustee for United Western Bancorp, Inc., which filed for bankruptcy subsequent to its subsidiary bank United Western Bank entering FDIC receivership. Both parties sought ownership of a $4 million tax refund. Although there was a tax-sharing agreement in this case, the appeals court applied an expanded version of the Bob Richards rule by applying it to situations where there is a tax-sharing agreement, unless the agreement very clearly specifies the beneficiary of the tax refund is other than the group member that created it.
It appears the Supreme Court’s decision will allow consolidated entity members, by way of their tax allocation agreement, to freely decide which entity in the group will be the beneficiary of a tax refund from the consolidated return — even if it’s not the entity whose underlying activity created the refund. The case illustrates the importance of making sure that tax-sharing agreements are clear and concise.