Pub. 7 2018 Issue 2

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 28 COMMUNITY BANKING TAX REFORM UPDATE By Brian Mall & Dodge Docheff, BKD LLP O N DECEMBER 22, 2017, PRESIDENT Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law. The TCJA represents one of the most significant revisions to the Internal Revenue Code (IRC) in more than 30 years. In this article, we’ll touch on what we believe are the most important tax reform provisions that will affect community bankers. To keep updated on tax changes, visit BKD’s Tax Reform Resource Center. Banks 1) C Corporation Versus S Corporation • A C corp bank will pay a flat tax of 21 percent in 2018. There’s still a double tax for every dollar distributed to the bank’s shareholders in the amount of up to 23.8 percent. • An S corp bank’s income will continue to flow through to the bank’s shareholders and will be taxed on their personal returns. The bank’s taxable earnings that are distributed to the bank’s shareholders will continue to be tax-free. The undistributed earnings will continue to increase the bank’s shareholders’ outside basis. * In 2018, the highest individual rate is 37 percent (40.8 percent if passive). In 2026, the highest individual rate is set to go back to 39.6 percent (43.4 percent if passive) if not extended. * In general, the bank’s shareholders will be entitled to a 20 percent pass-through deduction, which reduces the highest effective income tax rate on pass-through income to 29.6 percent (33.4 percent if passive). Please note this deduction is subject to numerous restrictions and limitations so your bank might not receive the full benefit. This deduction is eliminated in 2026 if not extended. • When evaluating the bank’s structure, the bank should consider the exit strategy, its shareholders’ estate planning, future dividends/shareholders’ immediate cash flow needs and the bank’s capital needs. 2) Other Key Bank Changes • Depreciation acceleration: * For qualified fixed assets acquired and placed in service after September 27, 2017, the bank is entitled to take 100 percent bonus depreciation on both new and used additions. After 2022, this percentage starts to phase down and is ultimately eliminated after 2026. * In 2018, the amount eligible for Section 179 (immediate tax deduction) is increased from $510,000 to $1 million. The increased amount starts to phase out when additions exceed $2.5 million. In addition to increasing the amount eligible for §179, the definition of eligible property was expanded to include certain improvements to nonresidential real property. • A C corp bank is allowed to use the cash basis method of accounting if the average gross receipts are below $25 million. • Meals and entertainment: * Most entertainment expenditures will be nondeductible after 2017. This includes donations tied to tickets for sporting events. * In general, most meals will still be subject to the 50 percent limitation. However, certain costs will be nondeductible starting in 2026. 2018 Ordinary Rates 2018 Capital Gains Rates Bracket Former Law* TCJA*^ Former Law* TCJA*^ $0–$19,050 10% 10% 0% 0% 19,051–77,200 15% 12% 0% 0% 77,201–77,400 15% 12% 0% 15% 77,401–156,150 25% 22% 15% 15% 156,151–165,000 28% 22% 15% 15% 165,001–237,950 28% 24% 15% 15% 237,951–315,000 33% 24% 15% 15% 315,001–400,000 33% 32% 15% 15% 400,001–424,950 33% 35% 15% 15% 424,951–479,000 35% 35% 15% 15% 479,001–480,050 35% 35% 15% 20% 480,051–600,000 39.60% 35% 20% 20% More than 600,000 39.60% 37% 20% 20% * Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000) ^ Expires after December 31, 2025 Bank Shareholders 1) Individual Rate Change (Married Filing Joint) Table