Thursday, April 18, 2024

Tax reform bill passed, signed by president

On Friday, Dec. 22, 2017, President Trump signed into law H.R. 1, which became Public Law No: 115-97.

“The process was a bit confusing, to say the least,” OBA President and CEO Roger Beverage said. “The bill had to be structured in such a way that it would fit into the ‘reconciliation’ process in the Senate and still be acceptable by the House.”

The bill was introduced and referred to the House Ways and Means Committee on Nov. 2, 2017. It was approved by the full House, 227-205, on Nov. 16. The measure was received by the Senate on Nov. 27, and passed on Dec. 2, 51-49.

A conference committee met and considered the different versions on Dec. 13, and the conference report was filed two days later. The conference report was approved by both the House and Senate on Dec. 20, and was signed by the president on Dec. 22.

“Thankfully, the ABA and the ICBA have both prepared summaries of the conference report for its members and the state associations,” Beverage said. (You can visit both websites – aba.com and icba.org — to check it out.)

“As I look at the language – which is a bit confusing – I think these are the key take-aways for Oklahoma banks:

1. Note:  All credit unions remain exempt from federal and state income tax:
An effort was made by Senate Finance Committee Chairman Orrin Hatch (R-Utah), to at least include a provision taxing credit unions’ “Unrelated Business Income.”
Hatch could not get the votes that were necessary to put it into the bill.
Hatch recently announced his decision not to seek re-election – that decision was directly related to his inability to deliver on this issue.

2.    The “Pass-Through” rate that applies to the 143 Subchapter “S” banks in Oklahoma:
Importantly, there is no distinction between “active” and “passive” shareholders.
Shareholders of Sub S banks are given a 20 percent deduction of the business income that comes from the bank. This makes the top effective tax rate roughly 30 percent (taxed at the new reduced ordinary individual rates):

The bill limits this deduction to 50 percent of W-2 compensation paid by the bank.
That limitation does not affect joint filers with taxable income of less than $315,000 or individual filers with taxable income of less than $157,500.
This deduction does include shares held in trusts and estates.
This favorable tax treatment becomes effective this year, but will sunset in 2025.

3.    Corporate Tax Rate: The corporate tax rate is reduced from 35 to 21 percent, and it’s permanent. It is already in effect for 2018.

4.    Business Interest Deduction: The House’s original version of tax reform included language that would prohibit the business interest deduction for banks and small businesses. In its place the Speaker’s idea was to substitute a plan to have businesses fund their operations by using equity markets, rather than using debt from traditional banks. A different approach was taken by the Senate, but at the end of the day, the compromise reached is that small businesses (those with gross annual receipts of $25 million or less) will be able to continue deducting their interest expense in full. Those above this artificial barrier will be limited to 30 percent of the entity’s “adjusted taxable income” or earnings before interest, taxes, depreciation, and amortization are taken into consideration. That limitation is to be changed in 2022.

5.    Tax Credits: Most tax credits are retained, including the research and development (R&D), low-income housing and new market and some others appear to be continued. There are some restrictions on historic credits.

6.    Capital Expensing: The final version includes the provision for 100 percent expensing for all non-real property capital expenditures made from Sept. 27, 2017, through 2022. This provision then phases out at 20 percent a year for five years, through 2026.

7.    Net Operating Losses: Net Operating Loss carrybacks are totally eliminated. Carryforward NOLs are allowed, but have an indefinite life and are subject to a 90 percent limitation.

“There’s a lot of misinformation out there that has confused people,” Beverage said. “Without trying to seem partisan, this bill is far from perfect, but it does contain some good things, like the reduction of the corporate tax rate. That will help every Oklahoma bank that’s organized as a C-corp.”

Beverage noted this reduction should also help Oklahoma businesses of all sizes.

“The changes in the pass-through rates for Sub ‘S’ corporations, LLCs and other non-‘C’ corp organizations should also be helpful,” he said. “We have a large portion of our state’s banks that are organized as Subchapter ‘S’ corporations. We’ll have to see, but I’ve had some people who know numbers much better than I do tell me this change should be very helpful.

“Everyone – not just banks – has cut costs and reduced expenses quite a bit in recent years. A long list of banks has already announced increases in their minimum wages and bonus payments to employees. Other corporations have done the same thing.

“This is really good news, for these consumers anyway. I think it shows at least some evidence that good things may very well lie ahead for consumers and for the nation’s economic growth, as much as the anti-Trumpers don’t want to admit it.

“I think we should be taking this development forward together and building on it for the benefit of the country, not for the benefit of political parties or individual politicians. I’ve about had it with this partisan division that’s been in the way of a lot of things, including banking reform.”