The long-awaited tax reform bill, H.R. 1, was rolled out last week by Ways and Means Committee Chairman Kevin Brady of Texas. The summary provided by the Committee hits the high points and is a short read.
This bill is designed to lower tax rates, stimulate investment and simplify the tax code. While difficult, if not impossible, to grasp the nuance buried in a 429-page “simplification” bill, there appear to be both very beneficial provisions and some potentially problematic areas. The issues to be addressed will become more clear as we, and others, review the bill text to determine the ultimate impact on community banking.
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Of particular note for banks is a top corporate tax rate lowered from 35 to 20 percent; a decrease in rate for pass-through entities, including Sub S banks, to 25 percent with potential issues regarding limitations; limitations on interest deductions for both commercial and personal borrowings (including a decrease in the mortgage interest deduction and phase out of the deduction for interest on home equity lines of credit and second homes); limits on deductions for FDIC insurance premiums for larger banks (>$10B); and additional limitations on deferred compensation plans. As mentioned, details on these and certainly other provisions will garner more clarity in coming days and weeks.
IBAT is working with other interested parties on the language for Subchapter S shareholders. As drafted, the bill does afford “passive” shareholders—meaning those not materially active in the business—the pass-through rate of 25 percent. Obviously, some Subchapter S shareholders include directors and officers who would not qualify under the passive definition.
IBAT has been active on a number of fronts as this proposal has been crafted and will continue to be engaged to ensure community banking is treated fairly and appropriately. We will provide additional information and potentially request your involvement as this saga unfolds.