IRC 2704, the PATH Act, and the short-term highway funding bill could bring significant changes to your shareholders and your institution.
As we approach year-end, many community banks have a clearer picture of their 2016 tax position than they have in recent years. This is mainly a result of the provisions contained in the Protecting Americans from Tax Hikes Act (PATH Act) that was passed in December 2015. But both the PATH Act and the short-term highway funding bill, signed last year, introduce new provisions that require attention.
PATH Act may impact banks
Last year’s PATH Act resulted in a number of changes that may impact community banks in 2016 and beyond. These changes include:
- The permanent increase of the Section 179 expensing limit to $500,000 (with a $2 million overall investment limit before phase out). Section 179 allows businesses to elect to expense some or all of their qualified fixed asset purchases in the year of purchase, rather than depreciating them over the standard tax life. These thresholds will also be indexed for inflation going forward.
- The extension of 50 percent bonus depreciation for qualified fixed assets purchases in 2016 or 2017. The bonus depreciation amounts will decrease to 40 percent in 2018, and 30 percent in 2019, and are then scheduled to expire.
- A permanent reduction of the S Corporation built-in gains tax recognition period to five years.
- Extension of the Work Opportunity Tax Credit (WOTC), which provides businesses with credits ranging from $2,400 to $9,600 per employee for hiring certain classes of individuals. These include the long-term unemployed, food stamp recipients, individuals living in empowerment zones, and unemployed or disabled veterans.
New Form 1098 disclosure requirements and tax return due dates
In addition, the short-term highway funding bill incorporated certain tax provisions that may also impact your institution or your shareholders. These include:
- Additional information reporting requirements on Form 1098 mortgage interest statements, including:
- Outstanding loan principal at the beginning of the year
- Date of mortgage origination
- Address of property securing the mortgage
- Changes to the tax return due dates for tax years beginning in 2016, as shown below:
| Form | Previous tax return due date | New tax return due date | Previous extended due date | New extended due date |
| C Corporation Form 1120 | March 15 | April 15 | September 15 | September 15 |
| S Corporation Form 1120S | March 15 | March 15 | September 15 | September 15 |
| Partnership Form 1065 | April 15 | March 15 | September 15 | September 15 |
| Individual Form 1040 | April 15 | April 15 | October 15 | October 15 |
Discounts for gifting and selling shares to family members could become limited
For some shareholders of closely-held community banks and their holding companies, a recent IRS proposal may also bring a new level of uncertainty to gifting or selling shares between family members. For many years, it has been common for estate planners to advise significant shareholders of banks and bank holding companies to gift or sell shares of the corporation to their children or other relatives. Traditionally, the value of these gifts has been heavily discounted, often by as much as 35 – 45 percent, for gift tax reporting purposes as a result of lack of control of the corporation by the recipient as well as lack of marketability of the stock. The ability to take these discounts has been a great way to leverage the gift tax exemption, allowing shareholders the ability to move $1 of stock while reporting a significantly lower value for gift tax purposes.
In August 2016, the IRS issued proposed regulations to severely reduce the ability to take these discounts when transferring closely-held corporation shares between family members. If the regulations are finalized as written, many estate planning and valuation professionals believe that the discounts for these types of transfers will be nearly eliminated.
These proposals, if enacted, would apply to situations where the shareholder either directly or as part of a family group controls at least 50 percent of the corporation, sells or gifts the shares to a relative, and where the family group maintains control of at least 50 percent of the corporation after the transfer. For these purposes, a family group includes the shareholder’s spouse, siblings, ancestors (such as parents and grandparents), and descendants (such as children or grandchildren), or any of those individuals’ spouses.
As noted, these proposed regulations were issued in August, prior to the November elections. With the results of the recent election, most estate planning advisors doubt that these regulations will move forward as currently written. Given the potential ramification of this proposal, closely-held community banks should inform shareholders to carefully review their estate plans with their attorneys and/or tax professionals as to the status of the proposed regulations, noting the impending change in presidential administrations.
How we can help
Implementing tax strategies at year-end can present unique challenges and opportunities. Work closely with your tax provider to ensure you fully understand and take advantage of the tax planning opportunities available to your bank and its shareholders.