How will a Trump Presidency impact bank taxes?

By Baker Newman Noyes December 20, 2016

Mercifully, our long presidential election is finally over. Our president-elect outlined many proposals during his campaign, and we all now have to wait and see which of President-elect Trump’s many campaign promises will ultimately be enacted.

One promise will certainly appeal to our Republican legislators: the lowering of U. S. corporate income tax rates. At certain points of the campaign President- elect Trump has discussed the possibility of lowering the corporate tax rate to 15%. This proposal, if implemented, will definitely be met with delight by corporate America and Banks across the country.

An aspect of the lowering of corporate income tax rates you might not have considered is the impact on your Bank’s deferred income taxes. Many banks have deferred tax assets recorded on their balance sheets as a result of temporary differences between the financial statement recognition of expenses, principally as a result of provisions for loan losses, and the periods those expenses are reflected in the tax return.

ASC 740, Income Taxes requires that deferred tax assets and liabilities be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted at the balance sheet date. The impact of a change in tax rates must be reflected in net income in the period of enactment. Therefore, any change in tax rates will impact calculated balance sheet amounts of deferred tax assets and deferred tax liabilities, with the adjustment flowing through income tax expense. In the case of lower tax rates reducing the benefit of future tax deductions, many banks will be required to record what could be a large income tax expense.

For example, let’s assume a community bank has net deductible temporary tax differences of $5,000,000, at a tax rate of 34%, and has a recorded deferred tax asset of $1,700,000. If the U.S. corporate tax rate is reduced to 15%, the value of the $5,000,000 future tax deductions is only $750,000. During the period the legislation is enacted to reduce the tax rates, the bank would be required to reduce its deferred tax asset by $950,000, and increase its income tax expense by $950,000.

The good news is that tax expense on future income will be reduced, so overall a positive development.

As with any changes in tax policy, there will be opportunities for you to consult with your BNN advisor for tax planning strategies that could benefit your institution.