2017 Tax Update. Kristine Hoeflin Partner. Amy Jessup Senior Manager

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1 2017 Tax Update Kristine Hoeflin Partner Amy Jessup Senior Manager

2 Agenda Community Banking Conference Proposed Federal Tax Reform Package Key Points How it could effect your institution, your customers, yourself Speculation Planning State Tax Update Information Returns

3 Proposed Business Federal Tax Reform Community Banking Conference Under the Trump and Blueprint proposals, the corporate tax rate would be lowered from 35 percent to 15 or 20 percent Changes in the corporate tax rate will result in a revaluation of deferred tax assets under GAAP, with impacts to the balance sheet and income in the period of enactment. While many institutions will experience a negative charge to income in the year of enactment due to revaluation of deferred tax assets, long-term rate savings present clear benefits.

4 Proposed Business Federal Tax Reform Community Banking Conference The rate change recapture period is a reflection of the relationship between timing differences and pretax income & permanent differences

5 Proposed Business Federal Tax Reform Community Banking Conference The rate change recapture period is a reflection of the relationship between timing differences and pretax income & permanent differences

6 Proposed Business Federal Tax Reform Community Banking Conference Decreasing the amount of timing differences prior to the rate change can provide permanent tax rate savings Identifying and evaluating planning ideas to claim accelerated deductions now at 34 or 35 percent tax rates presents the opportunity for permanent tax savings when compared to taking deductions in later periods at reduced corporate tax rates. Has your institution made the most of its opportunities to shrink its DTA prior to the rate change? Tax Methods Acceleration of Deductions Fixing Accruals

7 Proposed Business Federal Tax Reform Under the proposals, the corporate tax rate would be lowered from 35 percent to 15 or 20 percent Community Banking Conference Investment Planning There has been movement in the pricing of many tax favorable investments in recent months, accounting for potential changes in tax rates. It remains important to consider potential tax rate changes when evaluating investments such as tax credits, municipal bonds, bank owned life insurance, and low income housing investments, whose benefits are partially tied to the value of tax exemption or tax losses. Marketplace Competition For banks competing with credit unions, a decrease in the corporate tax rate would provide some level of relief to the competitive disadvantage of paying corporate taxes. Catalyst for State Changes While tax cuts are top of mind at the federal level, the views on tax rates of state and local jurisdictions vary, with some state and local jurisdictions contemplating increases and others contemplating decreases

8 Proposed Business Federal Tax Reform Community Banking Conference Under the proposals, a reduced rate would apply to business passthrough entities Similar to corporations, the proposals would permit entities organized as pass-throughs to tax income at a reduced tax rate. Income from these businesses is currently taxed at the individual rates. Financial institutions structured as S corporations can expect to see similar benefits from decreased tax rates as their C corporation counterparts under the current proposals. Borrowers structured as pass-through entities may see an increase in cash flow as a result of tax reform that may prove beneficial for loan repayment. It will be important for lenders and underwriters evaluating cash flows to be cognizant of the tax changes.

9 Special interest tax provisions would be eliminated Community Banking Conference The proposals call to eliminate special interest tax breaks, though none are specifically identified. Statements were made during Trump s campaign and in the Blueprint, with both noting elimination of special interest provisions but retaining the R&D tax credit.

10 Indefinite Net Operating Loss Carryforward Community Banking Conference Many financial institutions have net operating losses attained through acquisitions and subject to Section 382 annual limitations. Carryforward periods often result in limitations on a financial institution s ability to use the net operating losses prior to expiration, resulting in tax benefits lost in acquisition. The Blueprint calls for an indefinite carryforward of NOL s, with no carryback provisions. NOLs utilized would be limited to 90% of taxable income in a given year. An indefinite carryforward period means that net operating losses which may otherwise expire unused under the existing tax regime become utilizable.

11 Cost recovery for tangible and intangible property / Interest expense limitations Community Banking Conference The Blueprint calls for immediate expensing of property expenditures. The offset to immediate expensing would be a limitation on the deduction for interest expense, potentially limited to interest income. Impact on Financial Institutions With interest income exceeding interest expense, the ability of financial institutions as taxpayers to deduct interest expense would remain unchanged under the Blueprint. Impact on other businesses Interest expense may be carried forward indefinitely and deducted in future periods. Concerns Financial institutions as lenders may see concern with the Blueprint proposal to limit interest expense to the amount of interest income. Action Step The American Bankers Association submitted a letter to the Senate Finance Committee Chair urging the Committee to carefully consider the broader economic impact of any potential proposal that might alter interest expense deductibility.

12 Community Banking Conference Repeal of corporate AMT Many financial institutions have alternative minimum tax credit carryforwards. It is uncertain whether such carryforwards will retain value if reform is enacted. International Tax Changes The worldwide tax system would be replaced with a territorial system. A one-time tax would also be imposed on repatriated profits overseas. Border Adjustment Tax and possible repeal of Subpart F income

13 Community Banking Conference Individual Federal Tax Reform Fewer Tax Brackets The number of individual tax brackets would be reduced from 7 to 3, including a 10 percent, 25 percent, and 35 percent bracket or 12, 25, and 33 percent. The proposals do not indicate the level of income that would be taxed at the different brackets. How will tax reform be paid for? Commentary appears to indicate that support for business tax reform is stronger than individual tax reform.

14 Individual Federal Tax Reform Community Banking Conference Key Provisions The standard deduction would double Relief for families with children and dependent care expenses (Details unknown) Most itemized deductions would be eliminated, except for mortgage interest and charitable contributions. State sales and income tax deductions would also no longer be available. Repeal of the 3.8 percent Net Investment Income Tax (NIIT), the Alternative Minimum Tax (AMT), and the Estate Tax

15 Speculation Community Banking Conference Hurricane Legislation If hurricane relief legislation is passed, it will likely include targeted tax provisions. Republicans are aggressively pushing for tax reform before the next elections in November of 2018 However, technical details are far from being resolved Huge political hurdles exist compromises would need to take place between the House and Senate on the approach taken Republican majority in the Senate is thin, which creates a challenge Other issues are a distraction hurricane relief, healthcare, debt limit, government funding

16 Community Banking Conference Planning It is not clear whether any potential legislative changes will be temporary or permanent The fiscal year 2017 budget will not be used; federal tax reform under a budget reconciliation won t take place this year Federal tax reform under budget reconciliation will likely mean that related changes will be temporary

17 State Tax Update Community Banking Conference

18 State Taxes Community Banking Conference We recommend that all institutions reassess their exposure to taxes in states other than where income tax returns are currently being filed Nexus may be created in another state if: Loans are secured by property located in the state Services are provided to customers located in the state Employees work in the state

19 Information Returns Community Banking Conference

20 Modification to Mortgage Reporting Community Banking Conference Starting with 2017 Form 1098s, lenders will be required to report the following additional information: Outstanding principal on the mortgage at the beginning of the calendar year The date the mortgage was originated The address of the property securing the mortgage

21 Community Banking Conference Penalty Assessments are Common and Costly PENALTY IS $250 PER INFORMATION RETURN AND THE MAXIMUM ANNUAL PENALTY IS $3 MILLION The IRS has aggressively increased computer generated penalty assessments The assessments are very large Abatement of penalties is available for reasonable cause and first time compliance failure Systems need to be updated to prevent penalty notices and to response to matching notices

22 Information Return Penalties 22 IRC Failure to File Correct Information Returns Filed with missing/incorrect TIN (or other incorrect information); Filed untimely; Filed on paper when electronic filing was required (incorrect media); Filed in an incorrect format; or Any combination of the above. IRC 6722 Failure to Furnish Correct Payee Statements Failure to furnish a payee on or before the date prescribed to the person to whom such is required to be furnished; or Failure to include all of the information required or inclusion of incorrect information. IRC 6723 Failure to Comply with Other Information Reporting Requirements Failure to comply with a specified information reporting requirement on or before the time prescribed therefor.

23 IRC 6721 & IRC 6722 Large Businesses with gross receipts of more than $5 Million Time of Filing Due thru Due thru Due thru Due thru Not more than 30 days late $30 per return or $250,000 maximum $50 per return or $529,500 maximum $50 per return or $532,000 maximum $50 per return or $536,000 maximum 31 days late August 1 $60 per return or $500,000 maximum $100 per return or $1,589,000 maximum $100 per return or $1,596,500 maximum $100 per return or $1,609,000 maximum 23 After August 1 $100 per return or $1,500,000 maximum $260 per return or $3,178,500 maximum $260 per return or $3,193,000 maximum $260 per return or $3,218,500 maximum Intentional Disregard $250 per return or No maximum $520 per return or No maximum $530 per return or No maximum $530 per return or No maximum

24 IRC 6721 & IRC 6722 Small Businesses with gross receipts of $5 Million or less Time of Filing Due thru Due thru Due thru Due thru Not more than 30 days late $30 per return or $75,000 maximum $50 per return or $185,000 maximum $50 per return or $186,000 maximum $50 per return or $187,500 maximum 31 days late August 1 $60 per return or $200,000 maximum $100 per return or $529,500 maximum $100 per return or $532,000 maximum $100 per return or $536,000 maximum 24 After August 1 $100 per return or $500,000 maximum $260 per return or $1,059,500 maximum $260 per return or $1,064,000 maximum $260 per return or $1,072,500 maximum Intentional Disregard $250 per return or No maximum $520 per return or No maximum $530 per return or No maximum $530 per return or No maximum

25 Missing TINS and Incorrect Name/TIN Combinations Missing TIN(s) 25 A TIN is considered missing if it is not provided or obviously incorrect TIN with more or less than 9 digits TIN with a mixture of digits and letters Incorrect Name/TIN Combinations (including not currently issued TINs) Name/TIN combination is incorrect if it does not match or cannot be found on IRS or SSA files

26 Actions for Missing TINS and Incorrect Name/TIN Combinations 26 Missing TINS Initial Solicitation Must be made when account is opened If TIN is not received on initial solicitation, filer is required to make up to two annual solicitations First Annual Solicitation Must be made if TIN is not received on initial solicitation Must be made on or before December 31 of year account is opened (or January 31 for accounts opened in December) Second Annual Solicitation Must be made if TIN is not received on first annual solicitation Must be made after expiration of first annual solicitation but before December 31 of succeeding calendar year Incorrect TINS Must be made when account is opened No additional solicitation is required after receipt of TIN unless filer is notified by IRS or other that TIN is incorrect Must be made if filer is notified of an incorrect TIN (by broker or IRS CP2100/CP2100A or Notice 972CG) Must be made on or before December 31 of year in which filer is notified Must be made if filer is notified in any year following the year of the first annual solicitation that the account of payee contains an incorrect TIN

27 The CP2100 or CP2100A Notice 27 Missing TIN(s) Generally you must: Begin back up withholding and continue until a TIN is received Make a first annual solicitation; and a second annual solicitation, if required Report amounts withheld on Form 945, Annual Return of Withheld Federal Income Tax

28 The CP2100 or CP2100A Notice 28 Incorrect Name/TIN Combinations (including not currently issued TINs) Determine whether the IRS information agrees or disagrees with business records Does not agree If incorrect information was reported, correct records and include on future returns Information changed after filing, correct records and include on future returns IRS misprinted information, make a note in records and take no further action Agrees Send First B Notice and Form W-9 Update records with corrected information received from payee and include on future returns Begin backup withholding on payees who do not return a signed Form W-9

29 Notice of Proposed Civil Penalty 29 Notice 972CG Notice includes: An explanation of the proposed penalty; An explanation of how to respond to the notice; A record of each submission considered in the total penalty; A list of the information returns filed with missing or incorrect name/tin combinations; A summary of the proposed penalty; A response page; and A payment/correspondence slip.

30 Responding to Notice 972CG 30 Facts/Substantiation Need to provide a clear history Proof of timely filing Confirmation page from electronic filing upload Certified Mailing Return Receipt and/or USPS tracking information Proof of appropriate action following IRS notification Procedure for initial solicitations Record and timing of annual solicitations Record and timing of B Notices Record and timing of backup withholding

31 Responding to Notice 972CG 31 Reasonable Cause Taxpayer acted in a responsible manner both before and after failure occurred; and There were significant mitigating factors with respect to the failure Taxpayer has an established history of timely filing information returns Taxpayer has an established history of filing information returns with correct TIN s The failure was due to events beyond the filer s control Actions of the payee or any other person

32 Experience of Tax Controversy Team 32 What are we seeing? Commonly see cases of failure to file Generally due to inadvertence Commonly see cases of missing or incorrect TINs Various reasons Rarely see cases of failure to furnish Do not see cases of intentional disregard Chances of success? Good record of receiving abatement of penalties Resources IRS Publication 1586 IRS Publication 1281

33 Community Banking Conference The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but nor limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.