Tax Update for Financial Institutions

Tax Update for Financial Institutions

Financial Institutions Conference

Charles E. Marston, CPA, MSTPresident and Director of Tax Group

S.R. Snodgrass, P.C.

Impact of the Tax Cuts and Jobs Act of 2017

Pennsylvania Update

Accounting and Regulatory Issues

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Contents

Pennsylvania Institute of Certified Public Accountants • www.picpa.org

Impact of the Tax Cuts and Jobs Act of 2017

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TCJA of 2017

#1 #2 #3

Tax rate cut to 21% Section 199A 20% pass-through deduction*

Section 163(j) interest expense

disallowance*

Three Most Impactful Business Tax Changes

*Have little to no impact on Pennsylvania banks

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179 Expense • $1 million max (indexed for inflation)• $2.5 million investment limit

Bonus Depreciation• 100% 2018–2022• Phaseout 2023–2026• Used property OK

Depreciation – QIP • Eliminates QLI, QRP, and QRIP • Intended 15 year life (with bonus)• Error in language – 39 year life• Need correction (still waiting)

Depreciation Changes – TCJA of 2017

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• For NOLs ending after 12-31-17, no CB*• For NOLs ending after 12-31-17, CF life indefinite*• For NOLs beginning after 12-31-17, 80% limit on use• Wording creates possible fiscal year-end confusion*

*The Committee Report to the TCJA states the effective date is for NOLs arising in tax years beginning after 2017. The Joint Committee on Taxation’s report to the 2017 Act (the Bluebook) indicates a technical correction is needed.

NOL Rules – TCJA of 2017

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• Entertainment no longer 50% deductible beginning in 2018

• Meals are still 50% deductible

Meals and Entertainment – TCJA of 2017

What is “entertainment?” What is a “meal?”

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Notice 2018-76 provides guidance:Taxpayers may deduct 50 percent of an allowable business meal expense if:

1. The expense is an ordinary and necessary expense paid or incurred in carrying on a trade or business;

2. The expense is not lavish or extravagant under the circumstances;3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of

the food or beverage;4. The food and beverages are provided to a current or potential business

customer, client, consultant, or similar business contact; and5. In the case of food and beverages provided during or at an entertainment

activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

Meals and Entertainment – TCJA of 2017

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Meals and Entertainment – TCJA of 2017Notice 2018-76 provides guidance:The Notice also provides examples that help to clarify how to handle certain situations:For each example, assume the food and beverage expenses are ordinary and necessary business expenses incurred in carrying on a trade or business and are not lavish or extravagant under the circumstances. Also assume that the taxpayer and the business contact are not engaged in a trade or business that has any relation to the entertainment activity.

• Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.

• The baseball game is entertainment and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.

Example 1

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• Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.

• The basketball game is entertainment and, thus, the cost of the game tickets is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages is also an entertainment expense that is not deductible. Therefore, C may not deduct any of the expenses associated with the basketball game.

Example 2

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• Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.

• As in Example 2, the basketball game is entertainment and, thus, the cost of the game tickets, other than the cost of the food and beverages, is not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense. Therefore, C may deduct 50 percent of the expenses associated with the food and beverages provided at the game.

Example 3

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BOLI “Transfer for Value” Rules – TCJA of 2017

• IRC 101(a)(3)• TCJA corrected some life insurance “abuses”• Wording created issue for bank acquisitions • Causes BOLI of seller to be subject to “transfer for value” rules• Taxable upon death• DTL at acquisition?• Unintended? Waiting on correction

Proposed regulations: 3-25-19 to correct Prop. Reg. 103083-18

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Qualified Transportation Fringe Benefits –Employee Parking

TCJA amended Section 274 – limit tax deductions for QTFBs, including employee parking

Notice 2018-99• Makes clear that cost is relevant, not value• Costs include rent, repairs, utilities, insurance, taxes,

maintenance, etc. • Costs do not include depreciation

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2 Situations

• Disallowance = total cost • If amount > 132(f)(2) limit (2018 = $260 per month) then excess must be

compensation

1. Pays a third party for employee parking

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2 Situations

• Parking facility = Indoor or outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work

• The disallowance may be calculated using “any reasonable method” Until further guidance is issued “Value” not a reasonable method Method that fails to allocate expenses to reserved employee spots is

not reasonable

2. Owns or leases “parking facility”

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2 Situations

• Provides safe harbor method:1. Calculate disallowance for reserved spots using percentage of reserved

spots to total spots times parking costs2. Determine the “Primary Use Test”

On non-reserved spots To determine if primary use is for public parking If > 50% is for public parking, there is no further disallowance Normal business day and normal business hours

3. If Primary Use Test not met, calculate disallowance for employee parking using percentage of employee spots to total spots times parking costs


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2 Situations

• Allocating expenses is key Many examples in Notice

• Most treat facilities in different geographic locations separately• A lot of work for minor disallowed amounts for most companies• Further guidance is expected• What to do?


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AMT Credits – TCJA of 2017

• TCJA eliminated corporate AMT beginning in 2018• Any existing AMT credit Offset 100% of tax 2018–2021 “Refundable” credit

• 50% 2018–2020• 100% 2021

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Refunding Bonds – TCJA of 2017

• TCJA repealed tax exempt status of advance refunding bonds (issued after 12-31-17)

• Refunding bonds still exempt

Refunding bond – Bond used to pay principal, interest, or redemption price on a prior, maturing bond issue

Advance refunding bond – Bond issued more than 90 days before the maturity or call date of an outstanding bond

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Other – TCJA of 2017

• Like-kind exchange limited to only real property • 10% rehab credit repealed (20% stayed)• Moving expenses – no longer able to exclude relocation

costs to EEs• New ER credit for paid family leave• Dividends received deduction reduced (70% to 50% for

most)• “Opportunity zones”

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Pennsylvania Update

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Pennsylvania UpdatePA Tax Bulletin 2018-02

• Claiming educational tax credits after TCJA• Result of IRS regulations issued in 2018• “Federal tax deduction related to charitable contributions made with a state

on local tax credit attached must generally be reduced by the amount of the state or local tax credit received.”

• A month later, IRS issued clarification – business-related payments to charities or governmental entities can be deducted as business expenses

• PA Tax Bulletin clarified that contributions to a scholarship organization or education improvement organization can be deducted as a business tax expense on taxpayers’ federal tax return. This was needed due to specific wording in education tax credit law

• Pass-through/personal income tax – does need to add back credit received

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Pennsylvania Update

Nonresident Withholding • Act 43 signed 10-31-17• Requires PA tax withholding on payments of PA-sourced income

of nonemployee compensation > $5,000• As reported on federal 1099-MISC• Only for nonresident of PA payees• Also required for lease payments to non-PA lessor• In effect delayed until payments after 6-30-18

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Accounting and Regulatory Issues

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Accounting and Regulatory Issues• NOL CB rules of TCJA of 2017 Call report calculation of regulatory capital Disallows “DTA arising from temporary differences that could not be

realized through not operating loss carrybacks” This would now be all, since no CB allowed

• AMT Credit TCJA of 2017 eliminate corporate AMT and provide schedule to receive any

AMT credit DTA or receivable?

• ASU 2016-01 – Unrealized Gain or Loss on Equity Securities • ASC Topic 842 – Leases • ASC 606 – Revenue Recognition • ASU 2017-08 – Premium Amortization • CECL

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Tax Update for Financial Institutions

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