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Impact of Tax Cuts and Jobs Act on Banks

At Whittlesey, we have been monitoring the ebbs and flows of the Tax Reform Bill of 2017.  The Senate passed the bill on December 2nd and President Trump has indicated (in a tweet) that he expects to sign the bill into law before Christmas.

The House and Senate have similar bills but differences need to be ironed out before a single piece of legislation can be finalized and signed by the President.  The main piece of the proposed legislation that will impact banks is the reduction in the federal corporate tax rate from 34% to 20%.  In the Senate bill, if the legislation is passed by the end of the year, the new corporate tax rates are not slated to go into effect until January 1, 2019.  However, the House bill calls for the new rates to be effective on January 1, 2018 – more on this later.  We believe that that there is a very good chance the bill will be signed into law before the end of the year.

Generally accepted accounting principles (GAAP) require the impact of the reduction in the corporate tax rate on deferred taxes to be recorded in the period the law is enacted (2017 if signed into law in 2017), even though the benefit of a lower corporate tax rate will not be recognized until future years.  This will result in a bank having to adjust the basis in its deferred tax assets and liabilities downward to reflect the lower tax rate.  These adjustments are recorded in the tax provision in the income statement (P&L) and we believe that most banks will be required to take P&L losses in 2017 because they are in a net deferred tax asset position, and such losses may be significant. 

These adjustments are recorded through the P&L even if the deferred tax amount is a by-product of a non- P&L item such as a purchase accounting adjustment, or accumulated other comprehensive income (AOCI) adjustments (available for sale market value adjustment,  pension, and post-retirement liability adjustments or hedge accounting adjustment).

In subsequent years, the amounts that become “lodged” in AOCI will need to be separately tracked, and further adjustments will be required once investments and derivatives are sold or mature, or retirement plans are terminated.

The timing of this (proximity to year-end) is not good for accounting departments. They will need to determine the impact within a couple of weeks in order to close the books, issue earnings releases and/or submit the call report.

If the final bill includes the provision that the new rates will not take effect until January 1, 2019, the accounting department burden increases significantly.  Per GAAP, deferred tax amounts that reverse in 2018 will be tax effected at the current corporate rate and deferred tax amounts that reverse after January 1, 2019 will have to be tax effected at the new corporate rate.  This means that all deferred tax amounts will have to be reviewed to determine when they reverse – depending on the number of deferred tax amounts, and the difficulty in determining when some will reverse, it might be a very time-consuming task.  Being able to assess when a deferred tax amount will reverse also takes some level of expertise.

Whittlesey understands the banking industry, and we pride ourselves on helping others navigate change, especially during these complex times. The banking group at Whittlesey will be monitoring these issues over the next couple of weeks. To learn more on what we can do for you, click here

Please reach out to Brian Kerrigan (bkerrigan@wadvising) or Larry Carboni (lcarboni@wadvising) if you want to discuss this important topic in greater detail.

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