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2018 Review
Author: Alexis Long
As the year winds down, business owners can be thankful for the gift of perspective (among other things, we hope). Assuming you created a budget for the calendar year, you should now be able to accurately assess that budget by comparing its estimates to actual results. Your objective is to determine whether your budget was reasonable, and, if not, how to adjust it to be more accurate for 2019.
Identify notable changes
Your estimates, like those of many companies, probably start with historical financial statements. From there, you may simply apply an expected growth rate to annual revenues and let it flow through the remaining income statement and balance sheet items. For some businesses, this simplified approach works well. But future performance can’t always be expected to mirror historical results. For example, suppose you renegotiated a contract with a major supplier during the year. The new contract may have affected direct costs and profit margins. So, what was reasonable at the beginning of the year may be less now and require adjustments when you draft your 2019 budget.
Often, a business can’t maintain its current growth rate indefinitely without investing in additional assets or incurring further fixed costs. As you compare your 2018 estimates to actuals, and look at 2019, consider whether your company is planning to: build a new plant, buy a major piece of equipment, hire more workers, or rent additional space. There are external and internal factors, such as regulatory changes, product obsolescence, and in-process research and development; also may require specialized adjustments to your 2019 budget to keep it reasonable.
Find the best way to track
The most analytical way to gauge reasonableness is to generate year-end financials and then compare the results to what was previously budgeted. Are you on track to meet those estimates? If not, identify the causes and factor them into a revised budget for next year. If you discover that your actuals are significantly different from your estimates — and if this takes you by surprise — you should consider producing interim financials next year.
Some businesses feel overwhelmed trying to prepare a complete set of financials every month. So, you might opt for short-term cash reports, which highlight the sources and uses of cash during the period. These cash forecasts can serve as an early warning system for “budget killers,” such as unexpected increases in direct costs or delinquent accounts. Alternatively, many companies create 12-month rolling budgets — which typically mirror historical financial statements — and update them monthly to reflect the latest market conditions.
Do it all
The budgeting process is rarely easy, but it’s incredibly important. And that process doesn’t end when you create the budget; checking it regularly and performing a year-end assessment are key. We can help you not only generate a workable budget, but also identify the best ways to monitor your financials throughout the year. © 2018
Do you need a bank holding company?
For years, the vast majority of U.S. banks have used a bank holding company (BHC) structure. Recently, however, several prominent regional banks have elected to shed their BHCs by merging them into their subsidiary banks. This development has many community banks wondering whether the BHC model has become obsolete.
Pros and cons
The answer to this question: It depends (big surprise). Some banks may find that eliminating the BHC structure simplifies financial reporting, streamlines regulatory oversight and reduces administrative expenses. Others — particularly those that qualify as “small bank holding companies” — may find that the benefits of the BHC structure outweigh its costs.
It’s important to keep in mind that recent legislation expanded the definition of small BHC to include those with consolidated total assets of $3 billion or less (up from $1 billion). (See “Advantages of small BHC status.”) Here are some of the possible reasons for eliminating a holding company, along with a review of the continued benefits of the BHC structure.
Reasons for discarding your BHC
Potential advantages of eliminating a BHC include the following:
Reduced regulatory oversight. Banks without a holding company are no longer supervised by the Federal Reserve (the Fed) — except for Fed member banks. This can reduce compliance costs. The Fed strives to rely on an organization’s primary regulator and scales its supervisory approach depending on that organization’s complexity, risk and condition. So the cost savings from reduced regulatory oversight will likely be insubstantial for smaller organizations.
Lower administrative costs. Eliminating the BHC simplifies financial reporting and reduces costs associated with maintaining separate legal entities. These costs include additional taxes, fees, and accounting expenses; dual boards; and duplicative policies and procedures.
No need to deal with the SEC. Some BHCs must report to the SEC, but banks are generally exempt from the SEC’s registration and reporting requirements. However, it’s important to note that, in the absence of a BHC, some securities-related reporting requirements will shift to the bank’s primary regulator.
Benefits of BHC structure
Although the Dodd-Frank Act eliminated some earlier advantages of BHCs, most notably the inclusion of trust-preferred securities in Tier 1 capital, the BHC model continues to provide significant benefits for many banks, including:
Liquidity. BHCs have greater flexibility to repurchase stock. The ability of banks to create a market for their own stock is limited by state and federal law, and reducing capital usually requires prior approval.
M&A flexibility. BHCs (particularly small BHCs) have significant flexibility in structuring and financing M&A transactions. Plus, they can maintain acquired banks as separate institutions, allowing them to be integrated more deliberately with other subsidiary banks.
Increased permissible activities. BHCs may engage in specific business and investment activities that are off limits to banks. For example, a BHC may invest in up to 5% of any entity’s voting securities without prior regulatory approval.
Purchasing problem assets. BHCs can purchase problem assets from their subsidiary banks, helping them improve their capital ratios and otherwise strengthen their financial performance.
Dividend flexibility. BHCs have more flexibility than banks in paying dividends.
Leveraging debt. Small BHCs have the ability to use debt to raise capital for their subsidiary banks. (See “Advantages of small BHC status.”)
Long-term needs
If you’re considering eliminating your BHC, be sure to carefully weigh the potential cost-savings and other benefits compared with the benefits of maintaining the BHC structure. This is especially necessary if your organization has total consolidated assets of $3 billion or less. Also consider the costs and administrative burdens of merging your BHC into its subsidiary bank, including shareholder and regulatory approval, modification of contracts and policies, and advisory fees.
Even if you conclude the pros of eliminating the BHC outweigh the cons, evaluate your bank’s long-term needs. If there’s a possibility that a BHC structure will become advantageous down the road, it may be wise to retain it. Creating a new BHC when a need arises in the future may be difficult — if not impossible — and costly.
Sidebar: Advantages of small BHC status
Banks whose holding companies qualify as small bank holding companies (small BHCs) under the Fed’s small bank holding company policy statement enjoy significant advantages, especially when it comes to raising capital. And last year’s Economic Growth, Regulatory Relief and Consumer Protection Act expanded these advantages to a greater number of banks by raising the threshold for small BHC status from $1 billion to $3 billion in total consolidated assets.
Small BHCs can incur greater amounts of debt than other BHCs. Plus, they’re permitted to measure capital adequacy at the bank level only, without considering the BHC’s consolidated capital. This allows the BHC to borrow money — using virtually any type of debt instrument — and “downstream” the proceeds to a subsidiary bank in the form of capital.
Greater access to debt also gives small BHCs greater flexibility in structuring and financing M&A transactions.
© 2018
It’s not too late for businesses to implement some 2018 tax-saving moves. One is making the most of the new deduction for qualified business income.
For tax years starting after 2017, taxpayers other than corporations may be entitled to a Sec. 199A deduction of up to 20% of their qualified business income. For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business. Contact us for more info.
Categories
Growing Pains
5 Tips for Boosting Core Deposits
As interest rates continue to rise, competition among banks for core deposits is heating up. This creates a challenge for community banks striving to grow their core deposits to fund lending activities. On the one hand, banks need to consider paying higher rates to attract deposits. On the other hand, increasing the cost of deposits cuts into their profit margins.
Take the right steps
Here are five tips for attracting core deposits while keeping costs under control:
- Avoid short-term fixes. It’s important to recognize that building core deposits is a long-term strategy — there are no quick fixes. Offering above-market interest rates, for example, may attract new customers in the short term, but it’s unlikely to support sustainable deposit growth. That’s because customers who’re attracted to higher rates are more likely to abandon you when a better rate comes along. In the long run, it’s better to focus on customers who value service over interest rates.
- Don’t underestimate the importance of branches. A recent J.D. Power banking satisfaction study offers insights into the value of branches. According to the study, although 28% of retail bank customers are now digital-only, they are among the least satisfied. The most satisfied customers are “branch-dependent digital customers” — those who take advantage of online or mobile banking but also visit a branch two or more times during a three-month period.
Interestingly, the satisfaction gap between branch-dependent customers and more “digital-centric” customers was most pronounced among Millennials and Generation Xers. This is a bit surprising, since it’s commonly thought that younger customers eschew branches. It’s still the case that the majority of customers, including younger generations, prefer to open accounts at a branch — with personalized guidance — because they find it confusing to do online.
- Focus on service. According to J.D. Power, weaker performance in the areas of communication and advice, new account openings, and products and fees caused lower satisfaction levels among digital-only customers. To attract and retain engaged customers and grow core deposits, banks need to improve communications and provide quality, personalized advice and other services consistently. And it’s key to make these strides across both digital and branch channels.
- Specialize. Community banks that specialize in particular industries or types of banking are often able to attract customers who value specialized services over interest rates. The right niche — whether it’s health care, professional services firms, hospitality, agriculture or some other industry — depends on the bank’s history and the needs of the community.
- Consider reciprocal deposits. A provision of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 creates an opportunity for community banks to boost deposits by taking advantage of reciprocal deposits. These are deposits a bank receives through a deposit placement network in exchange for placing matching deposits at other banks in the network. One advantage of these networks is that they enable banks to attract large-dollar, stable, local depositors by offering them insured deposits beyond the $250,000 FDIC threshold. (Insurance coverage is increased by spreading deposits among several network banks.)
The act made it easier for banks to take advantage of reciprocal deposits by providing that these deposits (up to the lesser of 20% of total liabilities or $5 billion) won’t be considered “brokered deposits” if specific requirements are met. Brokered deposits are subject to a variety of rules and restrictions that make them more costly than traditional core deposits.
Develop a strategy
These days, it’s easy for customers to switch banks to obtain a higher interest rate. The key to attracting and retaining stable core deposits is to have a strategy for providing value (apart from interest) that makes customers want to stick around.
© 2018
As we approach the end of the year, it’s a good idea to review your business’s expenses for deductibility. At the same time, consider whether your business would benefit from accelerating certain expenses into this year. Be sure to evaluate the impact of the Tax Cuts and Jobs Act (TCJA), which reduces or eliminates many deductions. In some cases, it may be necessary or desirable to change your expense and reimbursement policies.
What’s deductible, anyway?
There’s no master list of deductible business expenses in the Internal Revenue Code (IRC). Although some deductions are expressly authorized or excluded, most are governed by the general rule of IRC Sec. 162, which permits businesses to deduct their “ordinary and necessary” expenses. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business. (It need not be indispensable.) Even if an expense is ordinary and necessary, it may not be deductible if the IRS considers it lavish or extravagant.
What did the TCJA change?
The TCJA contains many provisions that affect the deductibility of business expenses. Significant changes include these deductions:
Meals and entertainment. The act eliminates most deductions for entertainment expenses, but retains the 50% deduction for business meals. What about business meals provided in connection with nondeductible entertainment? In a recent notice, the IRS clarified that such meals continue to be 50% deductible, provided they’re purchased separately from the entertainment or their cost is separately stated on invoices or receipts.
Transportation. The act eliminates most deductions for qualified transportation fringe benefits, such as parking, vanpooling and transit passes. This change may lead some employers to discontinue these benefits, although others will continue to provide them because 1) they’re a valuable employee benefit (they’re still tax-free to employees) or 2) they’re required by local law.
Employee expenses. The act suspends employee deductions for unreimbursed job expenses — previously treated as miscellaneous itemized deductions — through 2025. Some businesses may want to implement a reimbursement plan for these expenses. So long as the plan meets IRS requirements, reimbursements are deductible by the business and tax-free to employees. Need help? The deductibility of certain expenses, such as employee wages or office supplies, is obvious. In other cases, it may be necessary to consult IRS rulings or court cases for guidance.
For assistance, please contact us. 731.427.8571 © 2018
Categories
Tax Update
Meals & Entertainment Deductions
The Tax Cuts and Jobs Act made changes to the rules governing the destructibility of meals and entertainment expenses for businesses. Essentially, entertainment expenses incurred or paid after December 31, 2017 are no longer deductible (previously deductible at 50% of the amount of the entertainment expenses incurred). Whether and to what extent business meals remain deductible has been the subject of a lot of speculation absent any IRS guidance in this area.
Below are both the IRS Information Release IR-2018-195 and Notice 2018-76 that sets forth guidance on the deduction for meals and entertainment following the new law changes. These informational releases are effective until the IRS issues proposed regulations clarifying when business meal expenses are deductible and what constitutes entertainment. Please contact your trusted ATA advisor with questions. Your success is our mission. http://bit.ly/2PVODr6
Tax-free fringe benefits help small businesses and their employees
In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay, but also appealing fringe benefits. Benefits that are tax-free are especially attractive to employees. Let’s take a quick look at some popular options.
Insurance
Businesses can provide their employees with various types of insurance on a tax-free basis. Here are some of the most common:
- Health insurance. If you maintain a health care plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages, but may be deductible on a limited basis as an itemized deduction.
- Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ premium payments (or other contributions to the plan) generally aren’t deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for disability benefits, which are excludable from their income.
- Long-term care insurance. Your premium payments aren’t taxable to employees. However, long-term care insurance can’t be provided through a cafeteria plan.
- Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 are taxable to the extent they exceed the employee’s coverage contributions.
Other types of tax-advantaged benefits
Insurance isn’t the only type of tax-free benefit you can provide ― but the tax treatment of certain benefits has changed under the Tax Cuts and Jobs Act:
- Dependent care assistance. You can provide employees with tax-free dependent care assistance up to $5,000 for 2018 through a dependent care Flexible Spending Account (FSA), also known as a Dependent Care Assistance Program (DCAP).
- Adoption assistance. For employees who’re adopting children, you can offer an employee adoption assistance program. Employees can exclude from their taxable income up to $13,810 of adoption benefits in 2018.
- Educational assistance. You can help employees on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance and qualified scholarships.
- Moving expense reimbursement. Before the TCJA, if you reimbursed employees for qualifying job-related moving expenses, the reimbursement could be excluded from the employee’s income. The TCJA suspends this break for 2018 through 2025. However, such reimbursements may still be deductible by your business.
- Transportation benefits. Qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling, are tax-free to recipient employees. However, the TCJA suspends through 2025 the business deduction for providing such benefits. It also suspends the tax-free benefit of up to $20 a month for bicycle commuting.
Varying tax treatment
As you can see, the tax treatment of fringe benefits varies. Contact us for more information.
© 2018
Is that still deductible? The Tax Cuts and Jobs Act generally eliminated the business deduction for entertainment expenses but not meal expenses. As long as certain conditions are met, taxpayers can still deduct 50% of the cost of business meals.
The IRS issued Notice 2018-76 spelling out the five conditions. The expense must be “ordinary and necessary;” the taxpayer (or an employee) must be present at the meal; the meal can’t be lavish; it must be provided to current or potential customers, and the meal cost must be separately stated from the entertainment cost.
