New Tax Law Accounting and Tax Issues
By David St. Yves, Partner, Assurance Services
On December 22, 2017, President Trump signed the historic Tax Cuts and Jobs Act (the “Act”) into law. The most significant provision in this bill that will have a positive impact on banks is the reduction in the corporate tax rate from 35% to 21%, effective for years beginning on or after January 1, 2018.
While the tax rate reduction will lower tax expense significantly in future years, the immediate accounting impact for nearly all banks caused a negative result for 2017. Under the current accounting standard, ASC 740, the effect of a change in tax law or tax rates is recognized at the enactment date, which in this case is 2017. This required deferred tax assets and liabilities to be recalculated and re-valued at the lower tax rate. The adjustment needed to re-value the deferred tax assets and liabilities was recognized through income tax expense in 2017.
The second, more onerous impact was the requirement under ASC 740 that the adjustment to deferred tax assets and liabilities for items now presented in Accumulated Other Comprehensive Income (“AOCI”) also be reflected as a current adjustment to income tax expense. The deferred tax effect of items in AOCI has traditionally being reported through Other Comprehensive Income and not through earnings. This requirement created a future accounting and reporting problem to track and account for these stranded tax effects.
FASB acted quickly to address this aspect of the current accounting standard. After a meeting of the FASB Board on January 10, 2018, FASB issued a proposed Accounting Standard Update (“ASU”) which ultimately was adopted as ASU 2018-02. This ASU allows for the reclassification of the stranded tax effects of the AOCI items to be reclassified between retained earnings and AOCI. This ASU allows for early adoption, which allows most banks to reflect this reclassification adjustment on their 2017 financial statements. This ASU will now eliminate the need for complex accounting for and tracking of these stranded tax effects.
As we move beyond the accounting issues brought on by the Act, attention can now be given to better understanding the other provisions of the Act and planning for them in 2018 and beyond. The Act contains a number of provisions that will have an impact on banks. Some of the more significant provisions include the following:
- The Alternative Minimum Tax (“AMT”) is repealed for corporations. The prior minimum tax credit is partially refundable in 2018 to 2020, with any remaining credit refundable in 2021.
- A number of changes in tax depreciation, including an increase in the Section 179 expense amount, an increase in the bonus depreciation to 100%, increases in the annual allowed depreciation of luxury automobiles, and a reduction in the depreciation period for residential and nonresidential real property to 25 years.
- The dividends received deduction is reduced from 70% to 50% to coincide with the reduction in tax rates.
- The use of cash basis accounting, which was limited to entities with $5,000,000 or less in average gross revenue, is now allowed for entities with $25,000,000 or less in gross revenue.
- Further limitations are imposed on the deductibility of business meals, and deductions for entertainment expenses have, for the most part, been eliminated.
While the above lists some of the more significant tax impacts of the Act, the actual bill passed contains 185 pages with tax law changes which affect all business and individuals.