Tax Planning for Banks

Need to Know:  A Financial Institution’s 2011 Checklist – Part 2

Tax Planning Considerations for Financial Institutions

In this second segment of our three-part series, “Need to Know:  A Financial Institution’s 2011 Checklist”, Bonadio Principal, Jamie Keiser, CPA, discusses tax planning for financial institutions, and what they should prepare to do as the calendar year comes to a close:

1099 Reporting

Starting in 2011, recipients of rental income of real estate must issue 1099’s for payments of $600 or more made to a service provider (i.e. plumber, painter, etc.).  Therefore, you need to implement a process NOW whereby you have those service providers complete a W-9 (Request for Tax Payer Identification Number and Certification) in anticipation of issuing 1099’s to them going forward.  If the Company does not collect the EIN/SSN from all vendors, then back-up holding at 28% is required.  There will be a penalty of up to $250 for non-filing per 1099 and deductions on tax returns will be denied if no 1099 is issued.

Starting in 2012, all Companies will be required to issue 1099’s to all vendors when purchasing goods and services in excess of $600. There will be a penalty of up to $250 per 1099 for non-filing.

Trust Preferred Securities (TPS) no longer qualify as Tier 1 Capital.  

This provision is NOT applicable to small bank holding companies (holding companies with less than $500 million in assets).  The Dodd-Frank financial reform act is phasing out trust preferred securities as a tax-efficient form of raising capital for financial institutions.  TPS issued by bank and thrift holding companies after May 19, 2010 will no longer qualify to be treated as tier 1 capital or core capital (may qualify as tier 2 capital or supplementary capital).  TPS issued before May 19, 2010 will continue to be treated as tier 1 capital for bank and thrift holding companies with less than $15 billion in assets as of December 31, 2009.  For bank and thrift holding companies greater than $15 billion in assets, they can continue to treat TPS issued prior to May 19, 2010 as tier 1 capital through January 2013 with a 3-year phase out beginning at that point in time.  Unless another hybrid-type security that qualifies for debt financing for tax purposes is created, financial institutions face a potential tax increase.

New assessments on financial institutions. 

Although the final legislation did not include a bank tax proposal, the Dodd-Frank financial reform act does require the financial regulators to impose several different assessments on financial institutions.  The assessments will offset the increased cost of the governments’ new responsibilities under this Act.  These assessments will be tax deductible as they are not deemed to be fines, penalties or an income tax.  In November 2010, the FDIC released a Notice for Proposed Rulemaking for comment, which included the following major provisions: (1) except as specifically provided for, the proposed assessment revisions would take effect for the quarter beginning April 1, 2011 and would be reflected in the June 30, 2011 fund balance and the invoice assessments due September 30, 2011; (2) the assessment base changes to average consolidated total assets (as defined) of the insured depository institution during the assessment (from adjusted domestic deposits); and (3) new assessment rates.  The new assessment rates were decreased in order to maintain neutral revenue on a new assessment base that is larger than before.  Stay tuned for more updates on this issue.

I will continue throughout the next year to keep you abreast of current developments impacting financial institutions.  With increased monitoring and reporting requirements as well as increased complexities in accounting for financial institutions, we can be your trusted advisor to help you navigate through the myriad of changes.  Please contact me directly at 315.214.7562 or jkeiser@bonadio.com with any questions or concerns or if I can be of any assistance to you and your institution.