The tax legislation that has been approved by both the House and Senate, will soon be on President Trump’s desk to sign. Known as the Tax Cuts and Jobs Act, the bill is set to make sweeping changes to the tax code for both businesses and households.

Several of the provisions in the bill, particularly the reduction of the corporate tax rate from 35% to 21%, will undoubtedly be a boon to the banking industry, raising financial institutions’ bottom lines. However, there are still other aspects of the bill that leave some concerns for banks.

Deferred Tax Assets

While a reduction in the corporate tax rate should prove beneficial in the long-term, the more immediate impact will mean an increase to the institution’s income tax expense. This is because a net deferred tax asset (“DTA”) carried on the balance sheet must be re-measured to carry the DTA at the lower enacted tax rate that will be in place by the time the DTA is realized.

The good news: since the lowered corporate tax rate is “permanent” (i.e., it is not scheduled to expire like other provisions in the bill), the computation is simpler as it will not require scheduling out the reversal of the deferred tax items.

The bad news: the income statement effect could happen immediately. The timing is dependent on when the bill is signed.

  • If President Trump signs in 2017, the impact will be recorded as a reduction of fourth quarter 2017 income.
  • The signing, however, may be delayed until January 2018 if Congress does not take action on certain unrelated spending measures before the holiday recess. If that happens, the effect will be accounted for in the first quarter of 2018. Consideration should be given whether this item is a material subsequent event that should be disclosed in the institution’s 2017 financial statements.

How big of a concern is this? Citigroup has estimated that, due to the lower tax rate, as much as $20 billion in deferred tax assets may have to be written down against its capital. Analysts estimate that about $7 billion of Bank of America’s deferred tax assets may be affected.

Deposit Insurance

Currently, banks are allowed to deduct their Federal Deposit Insurance Corp. premiums. Once the bill becomes law, it would eliminate that deduction for banks with more than $50 billion in assets, and limits the deduction for banks with assets of $10 billion to $50 billion. Banks with assets of less than $10 billion will still be able to fully deduct their deposit insurance premiums.

Housing and Mortgage

Although the original House plan was going to cap the mortgage interest deduction to loans of no more than $500,000, the House and Senate compromised at $750,000 in the final bill. The housing industry had opposed any cap, and particularly the lower cap proposed by the House, saying it would disincentivize homeownership. However, the National Association of Realtors, believes the $750,000 cap to be a “fair compromise,” and one that ultimately will, “benefit some communities and homeowners.”

However, one provision of concern to lenders that remains in the bill, is the elimination of the deduction on home equity loans, which many experts agree, will definitely reduce consumer demand for such equity lines of credit.

However, these concerns may only be temporary as the limitations revert to current law in 2026.

How MBAF Can Help

Of course, a brief advisory such as this, can only scratch the surface of how the new tax laws may impact the banking industry in general, and more specifically, your particular institution. Our financial institution specialists are hard at work, delving into every provision in the bill.

Once the changes become the “law of the land,” we will be available to help you not only remain in compliance with any new filing or reporting requirements, but we will also be able to provide expert advice on how you can take advantage of every opportunity to improve your institution’s bottom line that the changes may present.

Understanding the implications of the new tax legislation for the banking industry, can be complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Advisory, do not hesitate to contact our Financial Institution specialists, or call us at 1-800-239-1474.