Author: Maggie Jenkins

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Financial Institutions and Banking

Bank Wire

CECL: Banking agencies offer regulatory capital relief

The federal bank regulatory agencies recently finalized a rule that offers banks relief from the regulatory capital impact of the new Current Expected Credit Loss (CECL) standard. CECL discards the traditional incurred-loss model for recognizing credit losses in favor of a forward-looking approach. That is, banks will recognize an immediate allowance for all expected losses over the life of loans and other financial assets covered by the standard.

For some banks, adoption of CECL will negatively affect regulatory capital. Although the actual impact depends on a bank’s particular circumstances, many banks will experience an increase in allowance levels and a reduction in the retained earnings component of equity. This combination will lower their common equity tier 1 capital.

The final rule gives banks the option to phase in the day-one adverse regulatory capital effects of implementing CECL over a three-year period.

A BYOD policy protects banks

These days, the vast majority of your employees have smartphones. Use of these devices to send and receive work-related emails and other communications, and to access the bank’s files and other network resources, can boost productivity. But the ensuing security concerns have led some banks to prohibit employees from using their own devices for bank business. Although an outright ban can be hard to enforce, setting a bring-your-own-device (BYOD) policy enabling the bank to control these devices and manage the risk may be a better approach.

A BYOD policy should, among other things:

  • Provide for management approval and registration of all mobile devices that will access the bank’s servers,
  • Require employees to maintain up-to-date virus protection, authentication and encryption software on mobile devices,
  • Require employees to use strong passwords and other security controls to access mobile devices and the bank’s servers,
  • Specify what type of information can be stored on or transmitted by mobile devices,
  • Allow the bank to remotely wipe a device clean if it’s lost or stolen, and
  • Require employees to provide written consent to comply with the written security procedures before using the device for bank business.

Consider using mobile device management (MDM) software to manage employees’ devices and implement controls to protect the bank’s information.

Regulators approve lengthened examination cycle

On January 17, the federal bank regulatory agencies finalized a rule expanding the availability of an 18-month, on-site examination cycle for qualifying banks with less than $3 billion in total assets (up from $1 billion). The agencies reserved the right to impose more frequent examinations if deemed “necessary or appropriate.”

© 2019

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Financial Institutions and Banking News

Federal Reserve focuses on emerging risks

Late last year, the Federal Reserve released its inaugural Supervision and Regulation Report. The report is designed to summarize banking conditions and the Fed’s supervisory and regulatory activities.

Worth Noting

Here are some highlights from the report:

Banking system conditions. The Fed reports that the U.S. banking system is generally strong, that loan growth remains robust, that the volume of nonperforming loans has declined over the last five years, and that overall profitability is stable. Banks continue to maintain high levels of quality capital and have significantly improved their liquidity since the financial crisis.

Large financial institution (LFI) soundness. According to the report, the safety and soundness of LFIs continues to improve. Capital levels are strong and significantly higher than before the financial crisis. Recent stress test results demonstrate that LFIs’ capital levels would remain above regulatory minimums even after a hypothetical severe global recession.

Regional and community banking organization liquidity risk. The Fed reports that most regional banking organizations (RBOs) and community banking organizations (CBOs) are in satisfactory condition, and that 99% are “well capitalized.” Although liquidity risk is generally low or moderate for RBOs, examiners have observed some deterioration of liquidity positions.

The Fed also has identified opportunities for improving RBO risk management. In 2019, the Fed’s RBO supervisory priorities include:

  • Credit risk (concentrations of credit, commercial real estate [CRE] and construction and land development, and underwriting practices),
  • Operational risk (merger and acquisition risks, IT, and cybersecurity), and
  • Other risks (sales practices and incentive compensation and BSA/AML).

CBOs, the Fed observes, are in “robust financial condition,” with high capital levels and low-to-moderate liquidity risks. But like RBOs, CBOs have experienced “a slight uptick” in liquidity risks. Supervisors continue to focus on three areas of emerging risk: 1) management of concentrations of credit — specifically, CRE, agriculture, and oil and gas, 2) the impact of rising interest rates, and 3) increased liquidity risk.

CBO supervisory priorities for 2019 include:

  • Credit risk (concentrations of credit, CRE and construction and land development, and agriculture),
  • Operational risk (IT and cybersecurity), and
  • Other risks (BSA/AML and liquidity risk).

According to the report, the Fed also has made it a priority to modernize and increase the efficiency of the examination process to reduce the burden on community banks. A key part of this effort is the Bank Exams Tailored to Risk program. Under that program, each bank is classified into a low-, moderate- or high-risk tier. The classification provides examiners with a starting point for determining the scope of work, including the extent of transaction testing and other examination procedures. Examiners have the discretion to consider qualitative factors and apply their own judgment in confirming or adjusting the risk tiers.

A valuable tool

The Fed’s inaugural Supervision and Regulation Report examines trends going back to the financial crisis. Future reports will focus on developments since the previous report. Taken together, these reports provide banks with a valuable tool for keeping their fingers on the pulse of the banking industry and identifying emerging risks.

© 2019

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Financial Institutions and Banking

Staying Ahead of the Game

Abstract: The value of real estate collateral typically is fundamental to the value of many loan portfolios. So it’s important to stay on top of real estate value fluctuations and obtain periodic appraisals according to the rules. This article points out that lenders should understand interagency guidelines, maintain program independence, use selection criteria for valuators and become familiar with appraisal standards. The article suggests that, to ensure real estate collateral is sound, it’s important to set up an effective, efficient and comprehensive review program.

Staying ahead of the game

Review your real estate valuation program

The value of real estate collateral is likely fundamental to the value of your loan portfolios. So it’s important to stay on top of real estate value fluctuations and obtain periodic appraisals according to the rules. You also need to understand interagency guidelines, maintain program independence, use selection criteria for valuators and become familiar with appraisal standards. Doing all this can keep you ahead of the game.

What are the interagency guidelines?

Start your evaluation by revisiting the kingpin of any valuation program, the Interagency Appraisal and Evaluation Guidelines. They apply to appraisals and evaluations for all real estate–related financial transactions originated or purchased by regulated institutions, whether for the institutions’ own portfolios or as assets held for sale. The guidelines cover residential and commercial mortgages, capital markets groups, and asset securitization and sales units.

Most transactions valued at more than $250,000 require appraisals, though certain transactions — listed in Appendix A to the guidelines — are exempt. In addition to the exclusion for transactions at or below the $250,000 threshold, exceptions include:

• Business loans secured by real estate for less than $500,000 (the $500,000 limit for commercial loans took effect on April 9, 2018) whose source of repayment is from other than the rental income or sale of the real estate,
• Extensions of existing credits,
• Loans not secured by real estate, and
• Transactions guaranteed or insured by the U.S. government.

The exemptions are limited, so be sure to scrutinize transactions to determine whether risk factors or other circumstances make an appraisal necessary. Some exempt transactions require a less formal evaluation.

Is your program independent?

Your institution is responsible for developing an effective collateral valuation program. First, consider the independence of your program, which should be isolated from influence by your loan production staff. Individuals who order, review and accept appraisals or evaluations should have reporting lines independent of the production staff as well. Appraisers and individuals performing evaluations (“evaluators”) need to be independent of loan production and loan collection and obviously should have no interest in the transaction or property.
Special rules apply to smaller institutions that lack the staff needed to separate their collateral valuation programs from the production process. For mortgages and other loans secured by a principal dwelling, review amendments to Regulation Z that impose strict independence and conflict-of-interest requirements on appraisers.

What are the selection criteria for valuators?

Next consider how you select valuators. Set criteria for selecting, evaluating and monitoring appraisers and evaluators, and for documenting their credentials. Among other things, ensure that those selected are qualified, competent and independent and that appraisers hold appropriate state certifications or licenses.
Select and engage appraisers directly (though appraisals prepared for other institutions may be used if specific rigorous requirements are met). Approved appraiser lists are permitted, provided you establish safeguards to ensure that list members continue to be qualified, competent and independent.

What are the minimum appraisal standards?

Then make sure that your appraisals conform to the Uniform Standards of Professional Appraisal Practice, although safe and sound banking practices may call for stricter standards. Written reports should provide sufficient detail — according to the transaction’s risk, size and complexity — to support the credit decision.

Appraisers should analyze appropriate deductions and discounts (detailed in Appendix C of the guidelines) for proposed construction or renovation, partially leased buildings, non-market lease terms and tract developments with unsold units.

What are some other factors?

In addition to these touchstones, your program should facilitate credit decisions by ensuring the timely receipt and review of appraisal or evaluation reports. It also should provide criteria for determining whether existing appraisals or evaluations may be used to support subsequent transactions.

Moreover, your valuation program should have in place internal controls that promote compliance. And it should contain standards for monitoring collateral values and for handling transactions not otherwise covered by appraisal regulations.

If you outsource valuation functions, your institution remains responsible for all appraisals and evaluations. The interagency guidelines discuss the resources, expertise, controls and due diligence procedures your institution needs to identify, monitor and manage risks associated with these outsourcing arrangements.

Is it working?

The only way to ensure that your real estate collateral is sound is to set up an effective, efficient and comprehensive program. You’ll also need to review it regularly and adjust as needed to keep it on the right track.

© 2019

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What Does the New Lease Accounting Standard Mean for Banks?

Abstract: The Financial Accounting Standards Board’s new lease accounting standard takes effect this year for public business entities — and fiscal years beginning after December 15, 2019, for other organizations. The new standard may affect banks in two ways: First, it will cause many customers’ balance sheets to swell, which may cause some customers to violate loan covenants. Second, it will have an impact on banks’ own balance sheets, which may affect their capital ratios. This article discusses the ins and outs of the new standard, while a sidebar explains how to add flexibility to loan covenants.
What does the new lease accounting standard mean for banks?
The Financial Accounting Standards Board’s (FASB’s) new lease accounting standard, nearly 13 years in the making, finally takes effect this year for public business entities — and fiscal years beginning after December 15, 2019, for other organizations. By eliminating off-balance-sheet treatment for most operating leases, the new standard may affect banks in two ways: First, it will cause many customers’ balance sheets to swell, which may cause some customers to violate loan covenants. Second, it will have an impact on banks’ own balance sheets, which may affect their capital ratios.
A brief refresher
Under the previous lease accounting standard, leases were classified either as “capital” or “operating” leases. Generally, capital leases transfer ownership of assets to the lessee, while operating leases transfer the right to use assets during the lease term. Capital leases are reported on the balance sheet, but operating leases are not — though they’re disclosed in the financial statement footnotes.
The new standard retains the distinction between operating and capital leases (now called “finance” leases), but requires all leases, other than short-term operating leases (those with terms under one year), to be reported on the balance sheet. For each lease on the balance sheet, a lessee will record 1) a liability reflecting its obligation to make lease payments, and 2) an asset reflecting its legal right to use the leased property (a “right-of-use” or ROU asset). Both are based on the present value of minimum payments under the lease, with adjustments to the ROU asset for certain prepayments, incentives and costs.
Expense recognition under the new standard depends on a lease’s classification. For finance leases, organizations amortize the ROU asset, generally on a straight-line basis, and recognize interest expense and liability repayment over the life of the lease, similar to a loan. For operating leases, organizations generally recognize lease expenses on a straight-line basis, with certain adjustments.
Impact on loan covenants
As the new standard takes effect, borrowers with significant operating leases will experience an immediate increase in assets and liabilities on their balance sheets. As a result, some loan customers may be in technical violation of loan covenants that place limits on their overall debt or require them to maintain certain debt-related financial ratios. Banks should review all loan covenants to evaluate the impact of the new standard.
Whether it will have an adverse impact on borrowers depends in part on how “debt” is defined in the loan documents. The FASB, recognizing that the new standard might create issues with loan covenants, provided for operating lease liabilities to be characterized as “operating liabilities,” rather than “debt.” This action should prevent violations of some commonly used loan covenants. However, covenants that rely on financial ratios that include operating lease liabilities may present a problem.
Banks should consider modifying existing loan covenants to avoid unnecessary breaches and revise covenants going forward to reflect the new lease accounting standard. (See “Adding flexibility to your loan covenants.”) It’s important to recognize that the addition of operating leases to the balance sheet doesn’t change a borrower’s underlying economic situation, cash flow or ability to repay a loan. After all, in most cases, the borrower has been making these lease payments for years — the new standard merely changes the way they’re reported.
Impact on bank capital
For most community banks, the new lease accounting standard isn’t likely to have a significant impact on regulatory capital. But it may affect some banks with substantial operating leases for facilities, equipment and other fixed assets.
This is because the addition of ROU assets to the balance sheet may affect the ratio of capital to risk-weighted assets. The ratio is used to determine capital adequacy.
Some recommendations
All banks should review their loan documents and modify them if necessary to prevent inadvertent violations of loan covenants. They should also assess the impact of the new standard, if any, on their regulatory capital levels.

Sidebar: Adding flexibility to your loan covenants
The new lease accounting standard demonstrates how changes in financial reporting can affect compliance with loan covenants, even if the underlying economics are the same. As you review existing loan documents and negotiate new ones, consider incorporating covenant models that provide the flexibility needed to adapt to future changes in Generally Accepted Accounting Principles (GAAP). Two common approaches are:
1. Frozen GAAP. Covenants that contain a frozen GAAP clause provide that changes in financial ratios resulting from changes in GAAP won’t cause a violation. In other words, applicable GAAP is frozen as of the date the loan is made. The problem with this approach is that continuing to apply GAAP that’s in effect at the time the loan agreement is executed, regardless of future changes, essentially requires two sets of books: one to comply with GAAP and one to track compliance with loan covenants.
2. Semifrozen GAAP. A semifrozen GAAP clause requires the parties to renegotiate the loan covenant if a change in GAAP alters financial ratios. This approach avoids the need to keep two sets of books. But it requires the parties to amend the covenant to accommodate their respective needs while reflecting changes in GAAP.
© 2019

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Beware the Ides of March — if you own a pass-through entity

Shakespeare’s words don’t apply just to Julius Caesar; they also apply to calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes. Why? The Ides of March, more commonly known as March 15, is the federal income tax filing deadline for these “pass-through” entities.

Not-so-ancient history

Until the 2016 tax year, the filing deadline for partnerships was the same as that for individual taxpayers: April 15 (or shortly thereafter if April 15 fell on a weekend or holiday). One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April filing deadline. After all, partnership (and S corporation) income passes through to the owners. The earlier date allows owners to use the information contained in the pass-through entity forms to file their personal returns.

For partnerships with fiscal year ends, tax returns are now due the 15th day of the third month after the close of the tax year. The same deadline applies to fiscal-year S corporations. Under prior law, returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.

Avoiding a tragedy

If you haven’t filed your calendar-year partnership or S corporation return yet and are worried about having sufficient time to complete it, you can avoid the tragedy of a late return by filing for an extension. Under the current law, the maximum extension for calendar-year partnerships is six months (until September 16, 2019, for 2018 returns). This is up from five months under the old law. So the extension deadline is the same — only the length of the extension has changed. The extension deadline for calendar-year S corporations also is September 16, 2019, for 2018 returns.

Whether you’ll be filing a partnership or an S corporation return, you must file for the extension by March 15 if it’s a calendar-year entity.

Extending the drama

Filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now.

But to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the un-extended deadline. There probably won’t be any tax liability from the partnership or S corporation return. But, if filing for an extension for the entity return causes you to also have to file an extension for your personal return, it could cause you to owe interest and penalties in relation to your personal return.

We can help you file your tax returns on a timely basis or determine whether filing for an extension is appropriate. Contact us today.

© 2019

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4 Pillars of a Solid Sales Process

Is your sales process getting off-balance? Sometimes it can be hard to tell. Fluctuations in the economy, changes in customer interest and dips in demand may cause slowdowns that are beyond your control. But if the numbers keep dropping and you’re not sure why, you may need to double-check the structural soundness of how you sell your company’s products or services. Here are four pillars of a solid sales process:

1. Synergy with marketing. The sales staff can’t go it alone. Your marketing department has a responsibility to provide some assistance and direction in generating leads. You may have a long-standing profile of the ideal candidates for your products or services, but is it outdated? Could it use some tweaks? Creating a broader universe of customers who are likely to benefit from your offerings will add focus and opportunity to your salespeople’s efforts.

2. Active responsiveness. A sense of urgency is crucial to the sales process. Whether a prospect responded to some form of advertisement or is being targeted for cold calling, making timely and appropriate contact will ease the way for the salesperson to get through to the decision maker. If selling your product or service requires a face-to-face presence, making and keeping of appointments is critical. Gather data on how quickly your salespeople are following up on leads and make improvements as necessary.

3. Clear documentation. There will always be some degree of recordkeeping associated with sales. Your salespeople will interact with many potential customers and must keep track of what was said or promised at each part of the sales cycle. Fortunately, today’s technology (typically in the form of a customer relationship system) can help streamline this activity. Make sure yours is up to date and properly used. Effective performers spend most of their time calling or meeting with customers. They carry out the administrative parts of their jobs either early or late in the day and don’t use paperwork as an excuse to avoid actively selling.

4. Consistency. A process is defined as a series of related steps that lead to a specific end. Lagging sales are often the result of deficiencies in steps of the sales process. If your business is struggling to maintain or increase its numbers, it may be time to audit your sales process to identify irregularities. You might also hold a sales staff retreat to get everyone back on the same page. Contact us to discuss these and other ideas on reinforcing your sales process.

© 2018

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4 Business Function You Could Outsource Right Now

One thing in plentiful supply in today’s business world is help. Orbiting every industry are providers, consultancies and independent contractors offering a wide array of support services. Simply put, it’s never been easier to outsource certain business functions so you can better focus on fulfilling your company’s mission and growing its bottom line. Here are four such functions to consider:

  • Information technology. This is the most obvious and time-tested choice. Bringing in an outside firm or consultant to handle your IT systems can provide the benefits we’ve mentioned — particularly in the sense of enabling you to stay on task and not get diverted by technology’s constant changes. A competent provider will stay on top of the latest, optimal hardware and software for your business, as well as help you better access, store and protect your data.
  • Payroll and other HR functions. These areas are subject to many complex regulations and laws that change frequently — as does the software needed to track and respond to the revisions. A worthy vendor will be able to not only adjust to these changes, but also give you and your staff online access to payroll and HR data that allows employees to get immediate answers to their questions.
  • Customer service. This may seem an unlikely candidate because you might believe that, for someone to represent your company, he or she must work for it. But this isn’t necessarily so — internal customer service departments often have a high turnover rate, which drives up the costs of maintaining them and drives down customer satisfaction. Outsourcing to a provider with a more stable, loyal staff can make everyone happier.
  • Accounting. You could bring in an outside expert to handle your accounting and financial reporting. A reputable provider can manage your books, collect payments, pay invoices and keep your accounting technology up to date. The right provider can also help generate financial statements that will meet the desired standards of management, investors and lenders.

Naturally, there are potential downsides to outsourcing these or other functions. You’ll incur a substantial and regular cost in engaging a provider. It will be critical to get an acceptable return on that investment. You’ll also have to place considerable trust in any vendor — there’s always a chance that trust could be misplaced. Last, even a good outsourcing arrangement will entail some time and energy on your part to maintain the relationship.

Is this the year your business dips its toe in the vast waters of outsourced services? Maybe. Our firm can help you answer this question, choose the right function to outsource (if the answer is yes) and identify a provider likely to offer the best value.

© 2019

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Do your long-term customers know everything about you?

A technician at a mobility equipment supplier was servicing the motorized wheelchair of a long-time customer and noticed it was a brand-new model. “Where did you buy the chair?” he asked the customer. “At the health care supply store on the other side of town,” the customer replied. The technician paused and then asked, “Well, why didn’t you buy the chair from us?” The customer replied, “I didn’t know you sold wheelchairs.”

Look deeper

Most business owners would likely agree that selling to existing customers is much easier than finding new ones. Yet many companies continue to squander potential sales to long-term, satisfied customers simply because they don’t create awareness of all their products and services.

It seems puzzling that the long-time customer in our example wouldn’t know that his wheelchair service provider also sold wheelchairs. But when you look a little deeper, it’s easy to understand why.

The repair customer always visited the repair shop, which had a separate entrance. While the customer’s chair was being repaired, he sat in the waiting area, which provided a variety of magazines but no product brochures or other promotional materials. The customer had no idea that a new sales facility was on the other side of the building until the technician asked about the new wheelchair.

Be inquisitive

Are you losing business from long-term customers because of a similar disconnect? To find out, ask yourself two fundamental questions:

1. Are your customers buying everything they need from you? To find the answer, you must thoroughly understand your customers’ needs. Identify your top tier of customers — say, the 20% who provide 80% of your revenue. What do they buy from you? What else might they need? Don’t just take orders from them; learn everything you can about their missions, strategic plans and operations.

2. Are your customers aware of everything you offer? The quickest way to learn this is, simply, to ask. Instruct your salespeople to regularly inquire about whether customers would be interested in products or services they’ve never bought. Also, add flyers, brochures or catalogs to orders when you fulfill them. Consider building greater awareness by hosting free lunches or festive corporate events to educate your customers on the existence and value of your products and services.

Raise awareness

If you have long-term customers, you must be doing something right — and that’s to your company’s credit. But, remember, it’s not out of the question that you could lose any one of those customers if they’re unaware of your full spectrum of products and services. That’s an open opportunity for a competitor.

By taking steps to raise awareness of your products and services, you’ll put yourself in a better position to increase sales and profitability. Our firm can help you identify your strongest revenue sources and provide further ideas for enhancing them.

© 2018

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Fundamental tax truths for C corporations

The flat 21% federal income tax rate for C corporations under the Tax Cuts and Jobs Act (TCJA) has been great news for these entities and their owners. But some fundamental tax truths for C corporations largely remain the same:

C corporations are subject to double taxation. Double taxation occurs when corporate income is taxed once at the corporate level and again at the shareholder level as dividends are paid out. The cost of double taxation, however, is now generally less because of the 21% corporate rate.

 

And double taxation isn’t a problem when a C corporation needs to retain all its earnings to finance growth and capital investments. Because all the earnings stay “inside” the corporation, no dividends are paid to shareholders, and, therefore, there’s no double taxation.

Double taxation also isn’t an issue when a C corporation’s taxable income levels are low. This can often be achieved by paying reasonable salaries and bonuses to shareholder-employees and providing them with tax-favored fringe benefits (deductible by the corporation and tax-free to the recipient shareholder-employees).

C corporation status isn’t generally advisable for ventures with appreciating assets or certain depreciable assets. If assets such as real estate are eventually sold for substantial gains, it may be impossible to extract the profits from the corporation without being subject to double taxation. In contrast, if appreciating assets are held by a pass-through entity (such as an S corporation, partnership or limited liability company treated as a partnership for tax purposes), gains on such sales will be taxed only once, at the owner level.

But assets held by a C corporation don’t necessarily have to appreciate in value for double taxation to occur. Depreciation lowers the tax basis of the property, so a taxable gain results whenever the sale price exceeds the depreciated basis. In effect, appreciation can be caused by depreciation when depreciable assets hold their value.

To avoid this double-taxation issue, you might consider using a pass-through entity to lease to your C corporation appreciating assets or depreciable assets that will hold their value.

C corporation status isn’t generally advisable for ventures that will incur ongoing tax losses. When a venture is set up as a C corporation, losses aren’t passed through to the owners (the shareholders) like they would be in a pass-through entity. Instead, they create corporate net operating losses (NOLs) that can be carried over to future tax years and then used to offset any corporate taxable income.

This was already a potential downside of C corporations, because it can take many years for a start-up to be profitable. Now, under the TCJA, NOLs that arise in tax years beginning after 2017 can’t offset more than 80% of taxable income in the NOL carryover year. So it may take even longer to fully absorb tax losses.

Do you have questions about C corporation tax issues post-TCJA? Contact us.

© 2019

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A refresher on major tax law changes for small-business owners

The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly.

With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.

Taxation of pass-through entities

 

These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors:

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
  • A new 20% qualified business income deduction for eligible owners (the Section 199A deduction)
  • Changes to many other tax breaks for individuals that will impact owners’ overall tax liability

Taxation of corporations

These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:

  • Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Replacement of the flat PSC rate of 35% with a flat rate of 21%
  • Repeal of the 20% corporate alternative minimum tax (AMT)

Tax break positives

These changes generally apply to both pass-through entities and corporations:

  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
  • A new tax credit for employer-paid family and medical leave

Tax break negatives

These changes generally also apply to both pass-through entities and corporations:

  • A new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction (not to be confused with the new Sec.199A deduction), which was for qualified domestic production activities and commonly referred to as the “manufacturers’ deduction”
  • A new rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
  • New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Preparing for 2018 filing

Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes; you and your business could be affected by other changes as well. Contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for 2019, too.

© 2018