The Tax Cuts and Jobs Act (TCJA) will have an immediate impact for financial institutions. The good news is that the general expectation of the changes is to have a current tax benefit.
Whether structured as a C corporation or S corporation, banks will need to reassess their tax-planning strategies to account for major changes to the tax rates and other provisions. The changes would include reviewing their deferred tax assets, changes in permanent book to tax income differences, and much more.
Below is an overview of the TCJA’s provisions and the impact on C and S corporations:
If a bank is structured as a C corporation:
- Beginning in 2018, the TCJA established a flat, permanent 21% corporate tax rate. Fiscal-year corporations will need to compute tax using a pro-rata allocation based on days for the tax year.
- Alternative Minimum Tax (AMT) is repealed.
- AMT credits carried over into 2018 can offset regular tax liability with 50% of any remaining unused being refundable through 2020, and in 2021, 100% of the remaining AMT credits is refundable.
- Net operating losses (NOLs) generated in tax years after December 31, 2017, can offset only 80% of taxable income.
- NOLs generated after December 31, 2017, are no longer allowed to carryback but can be carried forward indefinitely.
If a bank is structured as an S corporation:
- Under Pre-TCJA, net taxable income from S corporations passed through to owners and was taxed at the owner’s tax rates. Beginning in 2018, the TCJA establishes a new deduction based on an owners’ qualified business income (QBI).
- The deduction equals 20% of QBI but is subject to limitations at higher income levels.
- The deduction does not affect the owner’s adjusted gross income (AGI), but it does reduce taxable income.
The following provisions will have an impact on banks regardless of classification:
- Certain meal expenses (beverages, snacks, staff lunches) that were previously 100% deducted are only 50% deductible, and entertainment expenses that were 50% deductible are now not deductible at all. Please visit the following site to obtain Wipfli’s Meals, Travel, and Entertainment checklist for additional guidance: www.wipfli.com/services/tax/tax-form-m-and-e
- Tangible personal property placed in service after September 27, 2017, can be fully expensed for tax purposes.
- Section 179 expense limitations were increased.
- Expenses related to transportation benefits, parking, and moving reimbursements are no longer excluded from an employee’s wages.
- A popular method to defer gains was through like-kind exchanges. As of January 1, 2018, tax deferrals from the exchange of tangible personal property must be recognized (e.g., vehicles).
The changes from the TCJA are now here and are in full throttle. There are still many questions to be answered, and the IRS will be issuing a steady stream of technical guidance in the coming months to answer many of those questions. In addition to the federal tax changes above, we are still waiting on guidance from states on whether they will conform to the TCJA.
If you have questions or need assistance with tax planning for your institution, please contact your Wipfli tax specialist or Wipfli relationship executive.