As the pandemic continues and the uncertainty of who will take control of the Senate is up in the air, major tax proposals are not anticipated immediately.
President-elect Biden’s tax proposal includes increased tax rates on corporations and high-income individuals but given the gridlock we still have in Washington it does not seem anything will come into place for this upcoming tax year.
The March 2020 CARES Act was primarily designed to aid taxpayers affected by COVID-19; it also presents several new tax planning opportunities that banks may be able to take advantage of:
The Employee Retention Credit
The Employee Retention Credit is a payroll tax credit that can provide a credit for wage paid when the business was closed due to a government mandate or had a 50% drop in gross receipts.
Although banks were not mandated to close, Texas did mandate that businesses make sure they were set up to enforce 6-foot social distancing.
Many banks were simply unable to do this quickly or in a cost-effective manner and had no choice.
There is still time to review whether your bank is eligible to claim this credit.
Qualified Improvement Property (QIP)
Qualified Improvement Property, or QIP, typically for a bank are leasehold improvements put in service during 2018 and 2019 now have a shorter 15-year tax depreciation life and qualify for bonus depreciation.
If your bank placed any assets into service that meet the definition of this type of property, action will need to be taken to treat this property correctly.
Recently, the IRS released new guidance giving taxpayers flexibility in claiming additional depreciation on assets previously placed in service by catching up the depreciation on current year return.
PPP Loan Processing Fee Income
PPP loan processing fee income received from the SBA was significant for many community banks. When received, we assumed most would be forgiven by year-end and the fees would be in 2020 income.
For financial reporting and regulatory purposes, the loan fees should be included in earnings over the life of the underlying loan.
Once the covered period was extended and the deadline for applying forgiveness was pushed way out, it became more likely that a substantial amount of these loans and associated fees would still be on the balance sheet at year-end.
Given that, the tax treatment of these fees needs to be considered carefully.
First, the bank needs to determine if these are service fees or points. The SBA called the fee a processing fee which suggests treatment as a service fee.
On the other side of the coin, the fee is calculated as a percentage of loan principal and the loan bears an interest rate below market which seems to imply treating the PPP fees as points may be correct.
The IRS has not provided any guidance about its interpretation of the fees.
Service fees include administrative fees such as underwriting and appraisal fees.
Service fee income is included in taxable income when received for cash basis banks and when earned for accrual basis taxpayers.
Regardless of cash or accrual basis, 2020 would be the year of inclusion for tax purposes since the fees should have been at least earned and most likely paid given that the application period is over.
If the PPP loan fees are treated as additional yield, then they would be booked into interest income over the life of the loan thus an accrual basis taxpayer may not pick up the fee income until the loan is forgiven in 2021.
Briggs & Veselka's dedicated Financial Services practice helps banks of all sizes understand these important topics as 2021 approaches. For help and guidance with your specific situation, please contact us.