bank tax planning: a new era of taxation?...• harvest capital losses in 2017 • delay exercise of...

w w w . e i d e b a i l l y . c o m

Eric D. Budreau, CPA, M.T. Partner

[email protected] 303.770.5700

Bank Tax Planning: A New Era of Taxation?

Andy Kaiser, CPA Partner



Agenda

• Tax Reform Overview

• Tax Reform Proposals • House GOP Blueprint • 2017 Tax Reform for Economic Growth and American Jobs

• President Trump Outline

• Planning Opportunities • Other Impacts

• Deferred Tax Assets and Capital • Mergers and Acquisitions • Entity Selection


Tax Reform Overview

• Tax reform today is generally thought of as the process of lowering tax rates while remaining as close to revenue neutral as possible.

• Generally achieved through a “broadening of the base” or “closing of loopholes”

• Keep in mind this ultimately results in “winners” and “losers”

• Different than “tax cuts” which are a cut in rates without the related increase in tax base


Simplification?


House GOP Blueprint

• Goals For Tax Reform:

• Fuel job creation and deliver opportunity for all Americans • Simplify the broken tax code and make it fairer and less

burdensome • Transform the broken IRS into an agency focused on customer service


House GOP Blueprint – Business

• 20% corporate tax rate, with 25% rate for pass-through businesses

• 100% expensing for equipment and real property (other than land)

• No deduction for business net interest expense

• Eliminate most special deductions / credits (retain LIFO and R&D credit)


House GOP Blueprint – Business, cont.

• Net operating losses (NOLs) carried forward indefinitely and increased by an interest factor compensating for inflation and a real return on capital

• Carrybacks of net operating losses will not be permitted

• NOL carryforward deduction limited to 90 percent of the net taxable amount

• Border adjusted destination cash flow tax on businesses

• Deemed repatriation tax: 8.75% cash / 3.5% other


House GOP Blueprint – Individual

• Lower individual tax rates, with 3 brackets: 12%, 25% and 33%

• Repeal AMT • 50% exclusion for capital gains, dividends and interest

(16.5% top rate)

• No itemized deductions other than contributions and home mortgage interest

• Repeal estate tax with step-up basis


2017 Tax Reform for Economic Growth and American Jobs

• Goals For Tax Reform:

• Grow the economy and create millions of jobs • Simplify our burdensome tax code

• Provide tax relief to American families – especially

middle-income families • Lower the business tax rate from one of the highest in the

world to one of the lowest


2017 Tax Reform for Economic Growth and American Jobs

Source: Journal of Accountancy “Trump’s tax reform priorities unveiled” by Paul Bonner | April 26, 2017

http://www.journalofaccountancy.com/content/dam/jofa/news/2017-tax-reform-for-economic-growth.jpg

http://www.journalofaccountancy.com/news/2017/apr/trump-tax-priorities-tax-reform-201716547.html


2017 Tax Reform for Economic Growth and American Jobs – Business Reform

• 15% business tax rate

• Territorial tax system to level the playing field for American companies

• One-time tax on trillions of dollars held overseas

• Eliminate tax breaks for special interests


2017 Tax Reform for Economic Growth and American Jobs – Individual Reform

• Tax relief for American families, especially middle income families:

• Reducing the 7 tax brackets to 3 tax brackets of 10%, 25% and 35%

• Doubling the standard deduction • Providing tax relief for families with child and dependent care

expenses


2017 Tax Reform for Economic Growth and American Jobs – Individual Reform, cont.

• Simplification:

• Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers

• Protect the home ownership and charitable gift tax deductions

• Repeal the Alternative Minimum Tax • Repeal the death tax

• Repeal the 3.8% Obamacare tax that hits small businesses

and investment income


Summary of Tax Reform Proposals

President Trump • Lower individual tax rates, with 3 brackets:

10%, 25% and 35% • 20% top capital gains rate, with repeal of

3.8% NIIT • Repeal AMT (for individuals and corps) • Double the standard deduction • No itemized deductions other than

contributions and home mortgage interest • 15% rate on corporations and business

income of “small” and “medium” size pass-through entities

• One-time deemed repatriation tax on existing overseas profits and move to a territorial tax system

• Repeal estate tax • Enhance childcare tax relief • Eliminate tax breaks for “special interests”

House GOP Blueprint • Lower individual tax rates, with 3 brackets:

12%, 25% and 33% • 50% exclusion for capital gains, dividends

and interest (16.5% top rate) • Repeals AMT (for individuals and corps) • No itemized deductions other than

contributions and home mortgage interest • 20% corporate tax rate, with 25% rate for

pass-through businesses • 100% expensing for equipment and real

property (other than land) • No deduction for business net interest

expense • Border adjusted destination cash flow tax

on businesses • Deemed repatriation tax: 8.75% cash /

3.5% other • Eliminate most special deductions / credits

(retain LIFO and R&D credit) • Repeal estate tax with step-up basis


Planning Opportunities – Business

• Model multiple years under current law and tax reform proposals

• Defer income to 2018 • Avoid sale of bonds at gain if possible • Structure sales with gains as installment sales

• Other Real Estate • Ensure bond discounts are being deferred until disposal

• Potential change in accounting method if not • Increased value in rising interest rate environment


Planning Opportunities – Business, cont.

• Accelerate deductions into 2017 • Prepay expenses (<12 month benefit)

• More flexible for cash basis taxpayers • Examples include:

• All insurances (health has been significant) • Real estate taxes • State income taxes • Maintenance contracts • Accounting fees (Really!)

• Accelerate necessary / planned capital expenditures

• Evaluate loan portfolio for all potential charge-offs



• Accelerate deductions into 2017, cont. • Sell instead of trading in assets with losses

• Luxury autos

• Evaluate overall method of accounting • If accrual basis and eligible for cash, change in accounting

method can result in significant negative 481a adjustment

• Bond Swaps • Consider bond swaps to produce ordinary losses if

replacement bond produces comparable yield when coupled with the current tax loss



• Accelerate deductions into 2017, cont. • For any OREO booked in 2017, write down to FMV in 2017

to obtain current deduction

• If OREO is being rented or available for rent, should be depreciated

• Bank branch remodels • Potentially fully expensed as Qualified Improvement

Property


Planning Example

ABC, Inc. owns a building that was purchased in 2014 for $1 million. ABC has a cost segregation study performed on their building and applies it to their 2017 tax return. The cost segregation study accelerates $100,000 of future depreciation deductions into the 2017 tax year where the top federal income tax rate is 39 percent, creating an immediate tax savings of $39,000. Assuming tax rates drop in 2018 and subsequent years to a top rate of 30 percent, the deductions that would have been taken by ABC had the cost segregation study not been done would have saved $30,000 in tax. By completing the cost segregation study and applying it to 2017, ABC realizes a $9,000 permanent tax savings. This is on top of the traditional benefits of accelerated cash flow generated by the $39,000 cost segregation study 2017 tax savings.


Planning Opportunities – Individual

• Defer income to 2018 • Contributions to qualified retirement plans

• Harvest capital losses in 2017

• Delay exercise of stock options, if feasible

• Defer retirement plan / IRA distributions (other than RMDs)


Planning Opportunities – Individual, cont.

• Accelerate deductions into 2017 • Considerations:

• Take into account AMT and 3% haircut on itemized deductions

• May result in benefit due to higher marginal rate in 2017

• Avoid uncertainty of any potential cap on itemized deductions

• Pay state estimated taxes and real estate taxes

• Accelerate sizable charitable contributions


Planning Opportunities – Individual, cont.

• If NII tax is repealed, tax rates for gains could be more favorable in 2018

• Capital gain exclusion proposal may provide state capital gain benefits in 2018

• If individual rates are reduced, may be beneficial to defer short-term gains

• If harvest losses in 2017, watch “wash sale” rules


Planning Opportunities, cont.

• What if I take action and tax reform doesn’t occur until 2018, or ever?

• Best case scenario is a permanent tax savings as highlighted

• Worst case scenario is receipt of time-value-of-money benefit received by deferring payment of tax at the same rate that it would have been paid at today

• Only true risk is if tax rates were to increase, which seems extremely unlikely at this point


Deferred Tax Assets and Capital

• Lower tax rates will have an impact on deferred taxes

• Could impact capital if currently receiving a benefit

• Simple example: Allowance for Loan and Lease Losses

Book Basis 1,000,000.00 1,000,000.00 Tax Basis - - Temp Dedudtible Difference 1,000,000.00 1,000,000.00 Tax Rate 34% 15%Deferred Tax Asset 340,000.00 150,000.00

Difference (190,000.00)


Deferred Tax Assets and Capital, cont.

• Reduction in DTLs as a result of reduced tax rates may result in additional capital that can be utilized for growth

• Change in deferred taxes is run through tax provision in year of law changes

• Lower rates result in reduction in current year tax provision • If DTA, may offset some impact of writedown

• Impact of DTA valuation allowances if NOL carryforwards

never expire?



SNL Financial, “With uncertainty looming over tax reform, banks brace for DTA hit”:

“Citigroup Inc. currently holds the highest amount of total DTAs, at approximately $47 billion as of the fourth quarter of 2016, according to regulatory data. Speaking on the company's 2016 fourth-quarter call, Citi CFO John Gerspach said about $40 billion of its DTAs are subject to U.S. federal law and that a drop to a 25% tax rate would result in about a $3 billion reduction in regulatory capital.”



Banks of other sizes are at risk, too. Los Angeles-based Hope Bancorp Inc., with about $13.44 billion in total consolidated assets, said in its fourth-quarter call that a 25% tax rate would cause the company to lose between $15 million to $20 million on its tax assets. At Pine Bluff, Ark.-based Simmons First National Corp., with about $8.40 billion in total consolidated assets, Chairman and CEO George Makris Jr. said that for every 5% the corporate tax rate falls, the company will have to write down about $4 million in DTAs.

Both companies insist that the one-time impacts, however, could be earned back relatively shortly.

"Basically it's about less than a year recovery earnback on that number," Makris Jr. said. Hope CFO Doug Goddard similarly said "we'd earn that back in less than a year."


Impact on M&A

• Increase in market liquidity?

• Lower tax rates reduce burden of selling low basis stock

• Elimination of estate tax reduces benefit of holding stock until death

• Lower tax rates result in increased cash flows

• Higher multiples?


Impact on M&A, cont.

• Anticipated tax reform’s impact, in part, seen on valuation of publicly traded banks following election:

Source: www.snl.com Used with permission from S&P Global Market Intelligence

http://www.snl.com/


Entity Selection

• Most common question we receive

• Not enough information exists to make definitive determinations at this time

• Analysis can be performed with outlined rate cuts as part of proactive analysis

• Important to be proactive in analysis and receptive to potential change

• Items that ultimately impact entity decision • Tax rates • Single vs. double taxation • Impact on stock basis

• Dependent on estate tax outcomes


Outlook for Tax Reform

• Will tax reform actually happen?

• If so, when will it take effect?


This presentation is presented with the understanding that the information contained does not constitute legal, accounting or other professional advice. It is not intended to be responsive to any individual situation or concerns, as the contents of this presentation are intended for general informational purposes only. Viewers are urged not to act upon the information contained in this presentation without first consulting competent legal, accounting or other professional advice regarding implications of a particular factual situation. Questions and additional information can be submitted to your Eide Bailly representative, or to the presenter of this session.

Questions?


Thank You!

Eric D. Budreau, CPA, M.T. Partner


Andy Kaiser, CPA Partner


mailto:[email protected]

mailto:[email protected]

bank tax planning: a new era of taxation?...• harvest capital losses in 2017 • delay exercise of...

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