Page 22 - 630578_IBAT-Jan-Feb2018

C Corporations Rate Change
It is most common for community banks to have a net
he most significant part of the tax reform deferred tax asset position due to sizable loan-loss re-
for C corporations is the decrease in corpo- serves. For these banks, this will force the write-down of
rate tax rates from a maximum of 35 percent these assets, which will run through 2017 earnings. For
to 21 percent effective for years beginning example, a bank with $3,000,000 of net timing differ-
T after December 31, 2017. With all else con- ences would have had a deferred tax asset of $1,020,000,
sistent, this decrease will allow more of the bank’s profit assuming a 34 percent rate. Now, the same bank would
to remain in the bank for growth or improve the return revalue the $3,000,000 at 21 percent—or $630,000—the
on investment to the bank’s shareholders in the form of benefit they will eventually receive when these items
increased dividends. become deductible. To reduce this asset by $390,000,
WHILE SOME OF THE REVISED OR NEW CODE IS RATHER
COMPLEX AND LACKING IN GUIDANCE OR INTERPRETATION, IT SEEMS
EVIDENT THAT MOST PROFITABLE BUSINESSES SHOULD BENEFIT
DRAMATICALLY FROM THE LOWER RATES.
C corporations are still subject to double taxation. the corporation would show a deferred tax expense of
The corporation will pay 21 percent. Assuming the re- $390,000 related to this rate change. This methodolo-
mainder of the earnings are eventually paid to share- gy of running through current expense is true even for
holders in the form of dividends, the shareholders could deferred tax assets that relate to items in Accumulated
be subject to tax at a rate as high as 23.8 percent on the Other Comprehensive Income (AOCI), such as unreal-
distribution of the after-tax profit—or a combined 39.8 ized gains or losses on securities. This will cause some
percent effective rate on all taxes paid by the corpora- skewed results in the bank’s regulatory capital since
tion and shareholder. AOCI is not included in that computation. On January
10, 2018, the Financial Accounting Standards Board in-
Deferred Taxes dicated that they plan to issue a proposal very soon on
The effect on financial statements could be very signif- how to deal with this discrepancy, and if issued before
icant for banks with large deferred tax assets (DTAs). your bank finalizes its 2017 financials, it should be help-
While the corporate income tax rate reduction will in- ful to you.
crease the bottom line for banks, it will also result in
write-downs of DTAs. You may have seen in the news S Corporations
over the past month that several large corporations are The pass-through business income deduction has many
announcing fourth-quarter charges to earnings due to twists and turns based on industry and shareholder
the rate change. A reduction in the corporate tax rate adjusted gross income (AGI), but it appears that banks,
necessitates a write-down of DTAs, as they are valued or more specifically bank shareholders, should have a
based on the current income tax rates. Specific exam- fairly straightforward application of the new deduction
ples of these assets include net operating loss carry-for- established by the act.
wards, loan-loss reserves and other deferred tax de- In general, an S corporation shareholder of a bank
ductions expected to be realized in future years. These should be able to take a deduction equal to 20 percent
deferred tax assets are created when an item is expensed of the business-related income from the K-1 excluding
on the books but not deducted on the tax return tempo- investment income, assuming they have sufficient tax-
rarily, due to the differences in GAAP and tax law. able income.
Conversely, deferred tax liabilities can arise when For higher tax bracket shareholders, the deduction is
income items are recognized slower or deducted more limited to the greater of 50 percent of allocable W-2 wag-
rapidly for income tax purposes versus book purposes. es, or 25 percent of W-2 wages plus 2.5 percent of unad-
The most common item creating deferred tax liabilities justed basis of qualified property. The unadjusted basis
is typically depreciation, where items are depreciated of qualified property probably would not be applicable
more quickly on the tax return than for books. These to most banks and is more applicable to capital-asset-in-
are good in the sense that the bank realized the deduc- tensive businesses such as real estate or manufacturing
tion at 34 percent instead of 21 percent. that do not pay significant wages but regularly purchase
22 | THE TEXAS INDEPENDENT BANKER