Tax Impact of a Trump Presidency on Community Banks

Adam Aucoin: Good. How about you, Joe? Excited to join you and talk taxes. Yeah, it is a beautiful Tuesday morning here for us recording. So we’ll just keep plugging away for the day.

Joe Jalbert: I’m always excited to talk taxes, especially with you. All right, well, Adam, you had mentioned that you recently attended the Bank Tax Institute conference. You mentioned to me previously that unsurprisingly, speculation over tax changes in Trump’s presidency were a big topic of conversation at the conference.

Adam Aucoin: Yeah. And it was kind of surprising at the conference, too, because they always schedule it right around the elections. And I was fully expecting not to have a result of the election while we were there because it started the day after the election ended. And sure enough, that first day we knew how it was going and everyone’s wheels were already spinning full blast on how do we plan for that and what do we think might happen. So certainly happy to elaborate on that and use that as a driving point for our conversation today.

Joe Jalbert: Well, timing is everything, isn’t it?

Adam Aucoin: That it is.

Joe Jalbert: Yeah. And maybe we should mention too, Adam, even though we selected the title Tax Impact of a Trump Presidency on Community Banks, I think what we’re really talking about here is not just a Trump presidency, but also a Republican controlled House and a Republican controlled Senate. And I think that’s really important for this conversation in terms of likelihood of passage of some of these things that we’re going to be talking about today.

Adam Aucoin: Extremely good point. Yeah, that’s exactly what it is. You can almost say red wave is the way we went with this, other than some margins and some fine tuning of the details. But it’s a good point that if you only had one of those levers, you have a much harder time passing these things.

Joe Jalbert: All right, great. Well, why don’t we get right into it? I think what might be helpful for the listeners first is maybe giving some historical context here in terms of what happened during the first Trump presidency in terms of tax policy and its impact on financial institutions. You want to give a little bit of background there.

Adam Aucoin: Yeah. So it’s a really good point to have a background in understanding what went through and what might expire and how they got it through, because they’re going to use similar processes as I think they extend or enact new policy. So really, the big key driver of the first Trump presidency was at the end of 2017, he signed into law the Tax Cuts and Jobs Act. A lot of the provisions went into effect 1/1/2018, and some minor tweaks here and there depending on what the item was. And he got that through because the Republicans controlled the House, the Senate and the presidency. So they were able to pass it through a process called budget reconciliation, which without getting into the details, there is essentially a process that allows them to bypass the 60 vote requirement in the Senate, which gets rid of the filibuster and other things, so allows them to pass these things essentially just needing 50 votes in the Senate or 50 with the tiebreaker, I should say, of the vice president, and needing just the majority in the House and then the president to sign off. And I think that budget reconciliation process is something that would be used again to pass any new legislation or extending any legislation. It’s been used historically a lot, too. The Democrats used it in 2022 with the Inflation Reduction Act, and it’s been used in a couple other instances as well. But just to go back on that, Tax Cuts and Jobs Act, things that happened from that, there was most sweeping tax reform we had since the 1986, essentially rewrite of the tax code. It reduced the corporate rate down to 21%, which is really what I think banks and our clients remember because that was a huge, deferred tax, asset reconfiguration and recalculation. But there were a number of other provisions in there that corporate tax rate was permanent, does not expire. A lot of these other things were expiring essentially because of the way budget reconciliation works. They can increase the deficit up to a certain amount within the budget period, which is usually 10 years. And then beyond that, it’s got to not increase the deficit. Some details to that, but high level, that’s kind of what it is. So the things that expired on the individual side, the section 198, 199, a deduction for small businesses, changes to the individual tax rates in those brackets, the SALT cap, the increased in the standard deduction, the state tax exemption doubled, repealed. The corporate amt, got rid of the AMT for a lot of individuals just based on the way they kind of changed the rules around that. So there were a number of things that changed, and a lot of that is set to expire or has already started the sunset, depending on the item.

Joe Jalbert: All right, great. That’s a very helpful summary and obviously it was a very comprehensive change in tax policy, as you had indicated. So, with that background, let’s turn to where things might go in Trump’s second term here, starting with the big one, as we all know, the corporate tax rate. There’s a lot of interest around that and where that might go or not go. So, what do you think? What are you hearing and what can we expect there?

Adam Aucoin: So, it’s a really good question because I think on the campaign trail, Trump had put out a couple different things on this. He’d said at one point maybe he liked to go down to like 20%, but then he also started talking about a 15% rate, but that seemed to apply to domestic manufacturers. Presumably that doesn’t pull in financial services. But again, this isn’t written down anywhere. I don’t know how much appetite would be out there to include other industries in this, so kind of remains to be seen. I think the bigger thing I’ve been hearing is it seems unlikely that Republicans have an appetite to increase the rate. But I’m also hearing that it’s not completely off the table if it’s needed to pay for other things. So, I don’t think it’s likely the 21% rate moves, but it’s also going to be really hard to tell in playing on it because there’s some slim chance if it appeases some other policies he has, maybe it’s in consideration. But he’s been pretty unlikely to want to move that in the past, too. So, kind of remains to be seen where that goes. But domestic manufacturers are probably going to get some type of benefit somewhere along the way, or that’s where he’s heading.

Joe Jalbert: All right, so we’ll just have to wait and see.

Adam Aucoin: I suppose this is that that’s the topic of conversation today, is wait and see what happens. We’re just pointing things out that may happen.

Joe Jalbert: Exactly, exactly. And some of our listeners that were around during the Tax Cuts and Jobs Act may recall what occurred when there was a change in the corporate tax rate. So just as a reminder to our listeners, your deferred tax asset or liability, as the case may be, would have to be remeasured based on that newly enacted federal tax rate, just given the change from the current 21% rate. So just something to keep in mind for all of our listeners there. All right, so where do we stand with the rest of Tax Cuts and Jobs Act provisions?

Adam Aucoin: So on the campaign trail, it was promising to essentially extend everything or make permanent. We’ll see which way it ends up going to extend it, whether they make it permanent or whether they have to extend it for a number of years. Again, with that budget reconciliation process, it can’t be deficit increasing after that budget period. And the last thing I saw put out in terms of what it costs to just extend the Tax Cuts and Jobs Act, it costs like $4.6 trillion. It’s a big number. So, they might have to curtail that back somewhere along the way in terms of how long it goes or what specific things get extended. So that’s a big piece of it. But I do think you’re likely to see something move. I know the House and Ways Committee there has already started to put together tax policy writing groups. So they’re already looking at this now they’re going to look at it more over the next couple months so that come January when Trump goes into office, going to be ready to move pretty quickly. And they’re still looking for some important things. But they definitely want a lot of this to be extended because they can see how this impacts almost everybody. A lot of people are going to see their tax rates go up or at least go back to what they were pre-Tax Cuts and Jobs Act because of this.

Joe Jalbert: Right. What are some of the other tax policies that Trump’s discussing?

Adam Aucoin: So that was interesting too, because again, he’s on the campaign trail and this is all from speeches, so it’s again, not written down anywhere. Tough to tell in terms of what actually happens and what doesn’t happen. But the big things he’s had is exempting tipped income, also had exempting overtime pay, exempting Social Security benefits from being taxed and tariffs were one of his bigger pay for 20% or 10 to 20% just about on everybody and then 60%, I think on specifically to China. So we’ll see what happens with that. But the tips one was interesting because I was just hearing Jason Smith, who leads the Ways and Means Committee, or is going to under the Trump administration, and has been involved in tax writing policy for a while. He had put something out there where he said essentially that this tipped income was something they ran on. And he does not foresee a budget reconciliation package being put out there without this being included. Again, another pricey one. We’ll see whether that actually happens because there would have to be some fine regulations around that, what is tipped income and what is not. And it’s just a really interesting proposal that’s going to cost some money, but there seems to be some real appetite for it to be included. On the flip side, the Social Security benefits that Trump had talked about, that’s one of the things within that budget, reconciliation things that it’s one of the things you can’t touch. The bird rule essentially exempts it out of it. So that is unlikely to end up in the bill on itself. So they’re going to either have to look for other ways to help Social Security benefit people to lower taxes in other ways, or they’d have to have a bipartisan legislation of some sort outside of it. So we’ll see where that goes. He’s had a lot of other policies he’s discussed and there are fairly pricey in terms of increasing the deficit too. And the tariffs piece of it can’t really be included as a pay for within the budget reconciliation process itself. I think though, it’s likely they might put a limit on how much they increase the deficit in that budget window. And then tariffs will be a narrative to explain how it’s paid for. Maybe it doesn’t show in this number, but they can explain in rhetoric this is how it’s being paid for is by tariffs or other measures or at least in part is paid for. So the numbers look worse than they actually are. At least that will be the narrative.

Joe Jalbert: Okay, all right. Interesting. So fair to say that this is all, while it sounds great, all very expensive.

Adam Aucoin: Yeah, I think that’s a very fair way of saying it is. Deficit hawks are going to have some power I think here. They have slim margins in the House, not quite as slim in the Senate, but still only three seat majority in the Senate. Any deficit hawk is going to have a little bit of power and might put their foot down on this in terms of how expensive can this be.

Joe Jalbert: Great point. So what are we thinking about in terms of timing on passing any or all of this? Listeners may recall getting a nice little Christmas present back in 2017, I believe it was. So is there a likelihood that we’re going to get a similar Christmas present maybe in 2025? What are you thinking as far as timing of all this.

Adam Aucoin: So I suppose it’s possible it goes that long. I actually think it could be quicker based on what we were hearing, especially on how this process works and knowing how quickly they’re already moving. They’re already looking at these things now before they even take office in January. Using the budget reconciliation process, you essentially get high level. You get one bite at the apple every fiscal year, which is a 9/30 year end for the government. You could have more in terms of fine details in terms of what you actually tried to change. But a policy this big is going to probably only allow one bite at the apple per year, and they’re probably going to want to be able to do it once in 2025 and again in ‘26 before the fiscal year ends. They might have some other package. So it’s also possible this gets separated into two different bills at different times, I suppose as well. But I think it’s likely they tried to do something before 9/30 as part of that and it could even be faster. They talked about doing it in the first hundred days. The example I think would be when the Democrats took office with President Biden’s win in early ‘21. I think it was March of that year that they had something passed with the Budget Reconciliation Act. Not as sweeping as I think is what we’re talking here, but they were able to get something done essentially within the first three months of Biden coming into office. I think that’s about the quickest end of this. But I also think it’s likely it could happen even before that. And maybe it won’t be a Christmas present, maybe it’ll be a Fourth of July gift or some sort.

Joe Jalbert: Okay, so sticking with the theme of wait and see, right?

Adam Aucoin: Yes, exactly.

Joe Jalbert: All right. Well, with all this being said, Adam, what are some things that our listeners should be thinking about here and is there anything that they can be doing from a tax planning perspective now?

Adam Aucoin: Really good question. And the answer’s kind of always been you should be ready to act quickly or at least be having conversations with your tax advisor and tax planning people and your board and everybody else on what will we do in this situation, what could we do in that situation? And it’s going to be speculative until we know more earlier next year. But a couple things I would definitely be at least considering is what do we do if the tax rate goes up, which seems unlikely now, but if it goes up, making sure that we’re deferring deductions and accelerating income to get the benefit of the 21% rate and then getting deductions at a higher rate later inverse being true, if the rate were to go down to say 15%, you want to get the deductions at 21% and defer the income until the 15% in a year. So it’s all things like that. And you only have so many levers you can play there, depreciation being a big one. Some other timing differences accrue compensation, pension plan contributions, things like that, just making sure you have the timing. So a lot of these things that you might do normally in terms of putting in some fixed assets in the service or making that pension plan contribution or accruing your bonus before year end, probably worth the conversation to see. What should the timing be? Should we kick the can down the road a year or should we accelerate the year? What steps do we need to take to get there? So I almost bring it back to do what you normally would do anyways and try to get the maximum tax benefit you can in the year. I don’t think it’s likely the rate’s going to go up. So in the meantime just keep getting as much tax benefit as you can to accelerate those deductions and use the time value of money savings that you would normally do. So it is interesting in terms of that tax rate planning and trying to figure out where do we go with that. But I think in general it’s just accelerate those deductions as best you can. Unless you’re in a position where you’re trying to utilize tax credit, carry forwards or charitable contributions and stuff like that, then you have some other considerations as well. But bigger picture too is being able to react quickly because I think this bill, as I said, it’s costly. There’s going to be some type of pay for in here that I don’t think we necessarily expect or can predict right now. It could be something like changing the exemption on municipal income. I heard someone talking the other day, they were from the Tax Foundation. So again they don’t write the policy, but they have some ideas. And maybe community banks would love to hear this. But do they start taxing credit unions and some of these other nonprofit things like the NCAA that makes billions of dollars every year? Maybe that comes into play or maybe they look at the 162M that limits compensation for publicly traded companies now to essentially that million dollars with some few different rules around that. But do they expand that to cover all C Corps or something like that to find a pay for? So I don’t know if any of that’s going to happen. We’ll see. But I think it’s something’s going to have to give, I think in terms of the pay fors and how do they make sure the deficit doesn’t grow too much and keep people happy. And that’s where you have to be able to rack quickly. Does it impact the bank? If so, what do we do? And then you get me or you get Joe or you get somebody on the horn to chat these things out.

Joe Jalbert: Great. Well, Adam, this has been great conversation and I think a lot of good information for our listeners. And as we said, there is a lot of wait and see here, but this is why it’s really important to be keeping in touch with your advisors. And obviously we’ll keep you all informed if there’s anything more that we hear about on the tax policy front with the incoming administration. Adam, that is our time for today. Is there anything else that you wanted to add that we haven’t already touched on?

Adam Aucoin: Nope. I think the wait and see was really the big thing and the other one is just being able to react quickly. And this is kind of where I really love my day-to-day job, the planning and getting into this. The compliance is kind of a byproduct of what we do in terms of the tax return. But this is really important. This is where the value is and this is where I love talking to people and helping out. So certainly bring me in the conversation as you can. And I just think it’s important to be able to react quickly. I mean, again, something’s going to come through you don’t expect many people. Remember, it wasn’t necessarily a large number for a lot of people, but that parking expense disallows that came in with the Tax Cuts and Jobs Act kind of came through last second. And we’re going through all the detail and those little things are things we can chat about and help you with and again, just be able to react quickly and swiftly. Unfortunately, this is probably part of the new norm too. I think every four years with a new presidency, tax policy is going to be up in the air. We’re going to have to be planning in these four or five year increments. So be ready.

Joe Jalbert: All right. Looking back to that time, I never thought in my life I would have so many conversations about parking expenses. Yet there we were. So maybe we’ll be right back there again.

Adam Aucoin: Yep, parking expenses. And then it seemed to turn right into the employee retention credit and every other favorite topic we have.

Joe Jalbert: So you got it. All right. Well, Adam, as always, great to chat with you today and I think we covered some great topics and things to look out for as Trump takes office for a second time.

Adam Aucoin: Yes, agreed. And thanks for chatting, Joe, and happy to chat with anybody anytime on these things. This is again something I find extremely exciting, even though probably nobody else does.

Joe Jalbert: Yeah, we’re always monitoring, sharing updates and developments, so stay tuned for more articles, podcasts and resources from our team. Thanks for listening. Goodbye. Thank you for listening to issues of interest from Baker Newman Noise. The BNN Banking Team thrives on solving complex business challenges and helping institutions meet their goals. You can find more of our industry content and subscribe to our newsletter at bnncpa.com if you’d like to connect with a member of our team, email info@bnncpa.com. Bye now.

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