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Tax Reform May Mean Deferred Tax Adjustments for Community Banks

December 14, 2017

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The House of Representatives and Senate have both passed their own tax reform bills, and now a Congressional conference committee has finalized a consensus bill that will likely be voted on later this week. If passed and ultimately signed by the President, this bill would significantly reduce the corporate rate from 34% to 21%.

While the reduction of the corporate tax rate would be an overall, long-term benefit for community banks, there is the possibility that it could result in a short-term downside. Deferred tax assets and liabilities resulting from the timing difference between taxes payable and receivable on the bank’s financial statement and tax return will need to be adjusted. Since a bank’s deferred tax assets and liabilities are calculated by applying the expected corporate tax rate to be in effect when the assets or liabilities are realized, a drop in the tax rate would require banks to immediately revalue their deferred tax assets and liabilities.

For example, a community bank with an unfavorable $1,000,000 in timing differences would have recorded a $340,000 deferred tax asset. If Congress passes the tax reform bill and the corporate tax rate decreases to 21%, the bank would need to immediately revalue the deferred tax asset to $210,000. This change in the deferred tax asset would need to be recognized on the income statement through tax expense, in the year the corporate tax rate change is enacted, resulting in a $130,000 negative impact on earnings. This adjustment also applies to the unrealized gain/loss on available for sale investments and the related deferred tax asset or liability. The impact will be reflected in current operations, through tax expense, and not as a change to accumulated other comprehensive income. Note: the American Bankers Association (ABA) is currently lobbying FASB to address the unrealized gain/loss issue and have the effect go through other comprehensive income and not earnings.

While the legislation still needs to be passed and then signed by the President, banks should be aware of the impact the rate reduction may have on their financials. It is important to note that any revalue of these deferred tax assets or liabilities follow the signing of the bill and not the effective date of the bill. If you’d like more information or want to discuss how your institution may be impacted, contact CSH advisors Jon Plunkett at 513.338.8256 or [email protected], or Scott Deters at 513.768.7523 or [email protected].

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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