Cost Segregation Can Help Banks Take Full Advantage of Trump Tax Rate Changes

With changes to tax regulations on the horizon, bank leaders should be thinking about how they are managing financial strategies. It’s likely that you are. Close to 74% of U.S.-based CFOs believe President Trump's principal focus should be corporate tax reform. [1]  And it is. The White House says tax reform is a major piece of their policy agenda.

Treasury Secretary Steve Mnuchin believes tax reform should be completed by Congress’s August recess. He notes that "This is optimistic, this is a big challenge, but we're going to try to get it done in that period of time, and if we don't we'll get it done right afterwards."

Yet, planning and doing are hardly the same. Very real hurdles exist for political leadership and bank leadership. On the political side, the undercurrent of skepticism about the Trump White House caused by events like the rejection of the American Health Care Act and in-fighting among the Republican party have decision makers questioning whether it makes sense to put already limited resources to work preparing for possible tax reforms. Many bank leaders are burdened already with significant efforts related to requirements like CECL implementation.

Regardless of political uncertainties, it is still critical to maintain a windshield view. It’s fair to think that some degree of tax reform is on the horizon. When and what remain to be known, but it is important to be proactive in how you’re positioning your bank to be prepared. 

Implications of the Possible Corporate Tax Rate Reduction

We see a few fundamental changes ahead. A smart plan begins with focusing on the priorities. The corporate tax rate should be one of those focus areas. As we noted recently, discussions are underway to reduce the top corporate tax rate from 35% to as low as 15%. Should that reduction happen, income associated with the 2016 tax year will be taxed at 35%. Income taxed in 2017 and later, however, would be taxed at lower rates. Therefore, accelerating tax deductions is more important than ever since the rate deferential creates a permanent benefit, rather than simply benefitting from the time value of money.

CFOs need to be aware of the impact the changes in the corporate tax rate may have on their financial statements, and not just on their tax returns. Generally Accepted Accounting Principles (GAAP) requires that companies “revalue” their deferred tax assets and liabilities in the period wherein tax legislation becomes law. Those changes to deferred taxes are to be recorded in the income statement. A company in an overall deferred tax asset position could reduce net income after taxes, as they will be lowering the asset on the balance sheet. This can have a material impact on a company’s earnings per share. Banks need to take actions to decrease their deferred tax asset now to spread the influence of the rate changes, rather than taking the entire hit in the year the new rates are enacted.

Cost Segregation Study Reveals Savings by Accelerating Depreciation

There are many different strategies for accelerating deductions and deferring income based on the unique circumstances of each taxpayer. The one that most likely applies to your bank is the use of a cost segregation study to identify ways to accelerate depreciation. This analysis will detect and separate the costs of personal property assets (wall coverings, carpet, wiring) and land improvements (landscaping, parking lots) from real property assets (buildings). It identifies assets embedded in an organization’s construction or acquisition costs that can be depreciated for tax over five, seven or 15 years, rather than the standard 39 years. The costs associated with these assets are then reclassified so you can accelerate depreciation of the property for tax purposes. This timing will significantly reduce your tax liability, improve cash flow, and decrease your deferred tax asset, softening the future impact of rate changes on your income statement.

Is your bank a good candidate for a cost segregation study? Generally speaking, if you’ve made a significant real property investment within the last ten years, then your bank is a prime candidate. Those investments include new construction and existing building purchases that cost more than $1 million; or building improvements, renovations or expansions costing more than $500,000.

HORNE is well suited to provide these analysis studies. Our team brings the requisite balance engineering expertise to analyze drawings and plans to segregate real property components from personal property, as well as a clear understanding of the constantly changing federal, state and local tax credits and incentives.

To understand what’s ahead in tax changes so you can capitalize on them, contact us. We look forward to helping you navigate the changing tax landscape.  

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[1] http://www.cnbc.com/2016/12/13/cfos-across-the-world-want-trump-to-focus-on-corporate-tax-reform-cnbc-survey.html