Tax Reform Impact on Financial Institutions
Passed in late 2017, the Tax Cuts and Jobs Act (TCJA) significantly changed many tax laws which impact financial services companies. Below are a few of the more pertinent items financial services companies should be consider entering 2019.
Some of the more significant changes impact C corporations. First, C corporations are no longer subject to a marginal tax rate schedule; rather, they are now taxed at a flat 21 percent for years beginning after Dec. 31, 2017. While this change reduces cash outflows, it will also cause a reduction in the value of deferred tax assets and liabilities.
The TCJA also eliminated the corporate alternative minimum tax. For those corporations with AMT credit carryforwards, the new legislation also provides for the refunding of the balance of those credits in the 2018 – 2020 tax years, with the remainder being refunded in 2021.
Corporate net operating losses generated in years beginning after Dec. 31, 2017, may no longer be carried back but may be carried forward indefinitely. The future utilization of those losses is limited to 80 percent of taxable income before the net operating loss carryforward.
The TCJA also eliminated the deduction for business related entertainment expenses (previously limited to 50 percent) and reduced the deductibility of meals provided on premises to employees to 50 percent from 100 percent.
The new tax law also increased bonus depreciation for assets placed in service between Sept. 28, 2017 and before 2022 from a 50 percent deduction to a 100 percent deduction for qualifying assets. Importantly, the TCJA removed the distinction between new assets and used assets (previously only new assets qualified for bonus depreciation). For assets not qualifying for bonus depreciation, the TCJA also increased the assets qualifying for Section 179 expensing and increased the limit to $1 million.
One of the more significant provisions in the TCJA provides deduction for owners of flow through entities equal to 20 percent of the entity’s qualified business income. For entities involved in service industries (such as financial services), the deduction is phased out as the owner’s taxable income increases from $157,500 to $207,500 ($315,000 to $415,000 in the case of a joint return).
Also noteworthy is that the new tax law reduces the individual income tax rates, with the top individual income bracket being reduced by 2.6 percent and now applying to taxable incomes greater than $599,000 for married filing joint taxpayers (prior to the TCJA the 39.6 percent top marginal bracket applied to incomes in excess of $470,000).
Other changes impacting individual owners of financial services entities include significant increases in the standard deductions and AMT exemptions and limiting the deduction for all state and local taxes to $10,000. As a result, it is estimated that going forward only 10 percent of individuals will find it worthwhile to file their returns with itemized deductions.
An additional consideration for banks and other lending institutions is that after 2021 the TCJA imposes a limitation on the deduction of business interest for taxpayers whose gross receipts exceed $25 million. The limit is 30 percent of taxable income without regard to interest expense, depreciation, amortization and depletion. While not directly impacting banks and lending institutions, this may have an impact on the amount customers borrow.
Our team has been helping financial services clients address the challenges and opportunities created by the TCJA. Please contact us if we can assist you in this process. To learn more about our services for the financial services industry, contact Lincoln Gray, Financial Services Industry Group Leader at firstname.lastname@example.org or 314.983.1235.