Current Tax Development for Regional Banks


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Current Tax Developments for Bybel Rutledge SEC Seminar. Federal Tax Legislation for banks, charge offs, Other real estate owned developments, Pennsylvania Shares Tax Developments.

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Current Tax Development for Regional Banks

  1. 1. Current Tax Developments November 20, 2013 Luke C. Martin, CPA Member of the Firm Information and training provided by Smith Elliott Kearns & Company, LLC is intended for reference only. As the information is designed solely to provide guidance to the participants, it is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations. Although Smith Elliott Kearns & Company, LLC has made every reasonable effort to ensure that the information provided is accurate, Smith Elliott Kearns & Company, LLC and its Members, managers and staff make no warranties, expressed or implied, on the information provided. The participant accepts the information as is and assumes all responsibility for the use of such information.
  2. 2. Current Tax Development Topics • Federal tax legislation for banks • Charge offs • OREO developments • Pennsylvania Shares Tax Developments
  3. 3. Federal Tax Legislative Updates • No significant legislation • Notice 2013-35 on bad debt regulation
  4. 4. Federal Tax Legislative Updates • Notice 2013-35 • Notice discussing and requesting public comments on Treasury Reg 1.166-2(d)(1) and (3) • Asking for comments by October 8, 2013
  5. 5. Charge Offs • Continued movement by the Internal Revenue Service Financial Institutions specialist to a position that GAAP and the Service’s definition of worthless do not agree, even to the point that Bank examiner ordered charge offs are not necessarily deductible. • For service, the loan must be deemed worthless in order to be written off, unless it meets one of the two conclusive presumptions
  6. 6. Charge Offs • Two conclusive presumptions • Historical Presumption Reg 1.166-2(d)(1) • Conformity Election Reg 1.166-2(d)(3)
  7. 7. Charge Offs • Historical presumption under Reg 1.166 – 2(d)(1)(i) is for banks without a conformity election and the presumption is that the loan was charged off in obedience with the Regulators during a safety and soundness examination. • This does not however apply to voluntary charge-offs on the same loans.
  8. 8. Charge Offs • Conformity Election • All banks should consider • Has met some resistance from IRS do to current economic conditions (large charge offs questioned for worthlessness)
  9. 9. Charge Offs “The bad debt conformity election” is found in code section 1.166-2 (d)(3), and was established by the Treasury as an effort to reduce disagreement between the IRS and banks.
  10. 10. Charge Offs • Provides a conclusive presumption of worthlessness based on applying a single set of standards for regulatory (book) and tax purposes • Presumption applies when election is made and satisfies an express determination requirement for the taxable year of election
  11. 11. Charge Offs • Designed to provide banks with greater certainty of the tax treatment related to bad debt deductions by providing the conclusive presumption of worthlessness under single standard when it is classified by the bank as a “loss asset” under the applicable regulatory standards.
  12. 12. Charge Offs • Banks should get express determination letter even if they are not sure they want to make the election, since it is necessary to have from the time of each exam. By have the letter it will give you the flexibility.
  13. 13. OREO • Issue is holding period cost • IRS has been very inflexible in this area • The problem has been with nonoperation OREO
  14. 14. OREO • Nonoperating OREO • Banks usually deduct cost as incurred • These cost must be capitalized into the basis of the property per the IRS audit manual (treated as being under Section 263A)
  15. 15. OREO • This treatment changed in February 2013 with the issuance of a Generic Legal Advice Memorandum “GLAM” , which indicated that holding period cost for OREO are not subject to Section 263A. • It concluded that OREO was not purchased by the Bank for resale, but was an extension of the Banks lending activity.
  16. 16. OREO • While a generic legal memo can not be cited as precedent, it appears that the issue may have gone away. • One problem remains for those banks that changed accounting methods to capitalization, is how to get back to the expensing method. • Obvious would be to file a 3115 and pay a user fee but if the original election was not valid do to Banks not qualifying under automatic changes may be able to change by filing amended returns. (Discuss with your CPA)
  17. 17. PENNSYLVANIA BANK SHARES TAX CHANGES • Effective for tax years beginning on January 1, 2014. (current year filings) • Changes were made via Act 52 passed on July 9, 2013, and are effective immediately • Seven main changes
  18. 18. PENNSYLVANIA BANK SHARES TAX CHANGES • Elimination of the use of a six-year moving average for equity capital • Will now be based on book value of equity capital at the end of the immediately preceding calendar year • Capital for non-controlling interest in consolidated subsidiaries will be excluded from the equity capital calculation. • Bank Shares Tax will be based solely on the receipts. (one factor and not three)
  19. 19. PENNSYLVANIA BANK SHARES TAX CHANGES • New rules for apportionment of receipts based more on market based sourcing in line with recommendations from the Multistate Tax Commission • Defines receipts for purposes of apportionment • Expand Nexus requirements. • Lowers tax rate to .89 from 1.25
  20. 20. Luke C. Martin, CPA Member of the Firm 804 Wayne Avenue Chambersburg, PA 17201 717-263-3910