With Donald Trump in the White House and Republicans maintaining a majority in Congress, there are high expectations for sweeping tax reform. Taxpayers anticipate passage of corporate and individual tax rate decreases and elimination of certain taxes, such as the Alternative Minimum Tax (AMT) and the estate tax.
Although no significant tax legislation has been enacted as of the date of this publication, there is still potential for legislative action during 2017. Legislation could be signed into law later this year, but those provisions could be effective for the 2017 tax year, the 2018 tax year, or even later. However, that does not mean these anticipated changes shouldn’t have a significant impact on 2017 tax planning.
With anticipated drops in effective corporate and individual tax rates, there could be major incentives to defer income to 2018 and accelerate deductions to 2017. You’ll need to follow current tax law for 2017 with an eye on what could happen with tax legislation and be able to react and adjust your 2017 tax plan (and longer-term tax planning) quickly if the changes should warrant it.
Year-End Planning Opportunities
Taking all of this into consideration, in order to maximize the effect of potential 2018 tax rate decreases, some strategies to consider for deferring income and accelerating deductions for the 2017 tax year include, but are not limited to, the following:
- Review your bank’s loan watch list and classified loans to determine if any additional charge-offs would be appropriate.
- For “other real estate” or “other personal property” repossessed during the year, make sure the property has been written down to fair market value. Keep in mind, the initial write-down should be booked to the loan loss reserve and is deductible as a loan charge-off. Subsequent write-downs to the property due to the decrease in value are non-deductible for tax purposes until the property is eventually sold.
- Currently, the expensing threshold for qualified furniture, equipment and other assets is $510,000 per entity, with phase-outs beginning at $2,030,000 of items placed in service for the year. If not fully expensed, 50 percent bonus depreciation on qualified new assets is available for 2017. If new equipment or furniture is needed, placing them in service during 2017 could yield permanent tax savings.
- Cost segregation studies could provide significant current-year (2017) deductions on buildings that may have been in service for several years. This study could take future tax depreciation deductions and place them in 2017, where a higher tax rate could likely be in effect than in future years.
- For cash basis banks, consider payment of accrued liabilities and paying certain short- term prepaid expenses that are qualified for accelerated deduction before year-end.
- Accrual basis banks may also prepay and deduct in 2017 some prepaid expenses, but the types available for deduction are more limited. Items such as taxes, insurance, and warranty contracts would qualify for this deduction.
- Generally, an accrual basis bank is allowed a current deduction for accrued bonuses if they are paid within the first 2 ½ months of the following tax year. However, there are tax deduction limitations if the bonus plan allows the bank to retain any amounts forfeited by employees.
- With significant differences in state rates of taxation, make sure state identification of loans, deposits and loan interest in- come is properly identified in bank records for apportionment calculations to the appropriate states, and be certain that all state tax filing requirements are being satisfied. If a state tax balance due is projected, payment of that balance due prior to December 31, 2017, would provide a federal tax deduction for 2017.
- Review your bank’s tax depreciation schedule for assets that are no longer in service and may have been disposed by the bank. If any tax basis remains in these assets, it can be deducted as a loss on disposal.
- Many luxury autos, due to depreciation limitations, have high tax bases in comparison to their trade values. Thus, a sale of the vehicle could generate a deductible loss, while a trade would defer that loss until the next vehicle was ultimately sold.
- It would be a good practice prior to year-end to review the dollar expensing threshold included in the banks capitalization policy and determine if that amount still makes sense for your bank. In addition, review your repairs and maintenance expense accounts and your current-year fixed asset additions to ensure all items are in compliance with the bank’s capitalization policy.
- A review of the bank’s available-for-sale security investment portfolio should be made and securities with unrealized losses should be considered for a sale in order to recognize the ordinary loss before year-end.
- For executives considering whether or not to exercise non- qualified stock options (NQSOs), it may be advantageous to defer exercise until 2018 when lower rates may be in place.
- For S corporation banks and holding companies, year-end tax planning time is a good time to perform some S corporation due diligence functions, to ensure that all S corporation eligibility requirements are still being met by the corporation and its shareholders. If shares were transferred during the year or new shareholders were added, it is important to make sure that all compliance with S corporation requirements is still in place, particularly if shares were transferred into trusts during the year. Care must be taken to be sure that IRS requirements, as well as Federal Reserve Bank rules, are being complied with.
Contact your Eide Bailly Professional for assistance with tax planning and tax reform questions.