Tax Alert: Year-End Tax Planning for Financial Institutions

As 2016 comes to an end, we’d like to take this opportunity to provide you a list of the more significant changes effective for the 2016 tax return year as well as some important reminders about tax filings and tax planning opportunities. For many of you, this is a review of items you have heard us discuss in our webcasts, bank forums and individual meetings throughout 2016.

Tax Law Changes and Updates for 2016

Although no major Federal tax legislation was passed during 2016, there were several provisions of the Protecting Americans from Tax Hikes Act of 2015 (“PATH”) which became effective beginning in 2016. Here are just a few of those tax law changes that may have implications for you this year:

  • Business Property – The PATH Act contained several provisions affecting tax deductions related to business property. These include the following:
    • The Section 179 deduction for capital investment in business property of $500,000 annually was a permanent extender (with an investment phase-out starting at $2,010,000 for 2016). These amounts will be indexed for inflation in future years.
    • The bonus depreciation deduction was extended through 2019 (with a 50% deduction in years 2015-2017, 40% in 2018 and 30% in 2019).
    • The 15-year tax useful life for qualified leasehold improvements was a permanent extender (as opposed to reverting back to 39 years).
  • Research Credit – The Research and Development Credit was permanently extended and now can be applied against Alternative Minimum Tax for certain small businesses (“Eligible Small Businesses”). In addition, certain small businesses may be able to offset a portion of their payroll taxes with the credit.

Below are some tax changes for 2016 filings that will likely impact financial institutions:

  • Form W-2 – Required to be electronically filed with the SSA by January 31, 2017. A one-month extension may be requested by filing Form 8809 by January 31, 2017.
  • Form 1099-MISC (with nonemployee compensation, box 7) – Required to be electronically filed with the IRS by January 31, 2017.
  • Form 1098
    • Report mortgage insurance premiums paid of $600 or more in box 5.
    • Report the address or description of property securing the mortgage, the outstanding mortgage principal as of January 1, 2016, and the mortgage origination date.
    • The official IRS Form 1098 has increased in size from a 3-to-a-page to a 2-to-a-page format, beginning with tax year 2016, to allow space for the above additional information.
  • Form 1099-C – 36 months of nonpayment is no longer a reporting event for filing this form.
  • Form 1120, Corporation Income Tax Return – due date changed from March 15 to April 15 for calendar year corporations and 3½ months after year-end for fiscal year corporations.
  • Form 1065, Partnership Income Tax Return – due date changed from April 15 to March 15 for calendar year partnerships and 2½ months after year-end for fiscal year partnerships.
  • North Carolina corporate income tax rate will be reduced to 3% in 2017. Deferred tax assets related to North Carolina will need to be revalued in 2016 for this new rate.

Tax Reminders

Below are some tax reminders that may apply to your financial institution:

  • Form 3921, Exercise of an Incentive Stock Option – File if there has been an exercise of incentive stock options during 2016.
  • Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan – File if the exercise price was discounted upon first transfer of stock exercised under an ESPP during 2016.
  • Form 8937, Report of Organizational Actions Affecting Basis of Securities– Required to be completed if you had an activity in 2016 that affects shareholder basis. This could include stock splits, stock dividends, merger transactions, cash distribution treated as a return of capital, etc.
  • State Sales and Use Returns – This continues to be an area where financial institutions are being audited. If you are unsure if your bank is meeting its reporting obligations, please let us know and we can help you determine your filing requirements.
  • State Income/Franchise Tax Returns – If you answer “yes” to any of these questions, please let us know so we can determine if you have nexus in any state where your bank is not currently filing returns:
    • Do you have employees who work in a state where you do not file a state income/franchise tax return?
    • Do you have a branch in a state where you do not file a state income/franchise tax return?
    • Do you have brokers in a state where you do not file a state income/franchise tax return?
    • Do you have OREO located in a state where you do not file a state income/franchise tax return?
    • Do you have loans secured by property located in a state where you do not file a state income/franchise tax return?
    • Are you the lessee or lessor on property located in a state where you do not file a state income/franchise tax return?
  • DOL’s Overtime Rule was blocked by the U.S. District Court – Here is our Tax Alert of December 1 discussing this change.

Tax Planning

Below are some common federal and state tax planning and credit opportunities that may be beneficial to some financial institutions:

  • Cost Segregations – Let us know if your bank builds or expands a building/branch. We can give you a cost/benefit analysis to help you determine if this tax opportunity is right for you.
  • Captive Insurance Arrangements – Risk management tool with some tax benefits
  • Low Income Housing Tax Credit
  • Research and Development Tax Credit
    • Available at federal level and some state levels
    • Includes internal use software development as long as it is used to interact with third parties
  • North Carolina – Rehabilitation of Income-Producing Historic Property (new credit effective January 1, 2016, and sunsets January 1, 2020)
  • Georgia
    • Quality Jobs Tax Credit
    • Retraining Tax Credit
  • South Carolina
    • New Jobs Credit
    • Community Development Credit
    • Abandoned Buildings Revitalization Credit
    • Textiles Revitalization Credit
  • Virginia – Historic Rehabilitation Credit

Future Tax Changes

Many potential changes to the U.S. tax system are likely in the near future as a result of the recent presidential and congressional elections. Here is a link to our Tax Alert of November 14 discussing these potential changes.

For more information or assistance, please contact your Elliott Davis Decosimo financial institutions tax advisor or email