The Tax Cuts and Jobs Act: What community bankers should know

Persistent advocacy achieves results in the Tax Cuts and Jobs Act.

By John Hand and Alan Keller

Many Americans file their tax returns this month, community bankers have much to celebrate on Tax Day 2018. The tax reform act signed into law at the end of last year offers substantial relief after ICBA and community bankers achieved significant improvements over some 18 months of debate. Here’s a breakdown of the Tax Cuts and Jobs Act following the industry’s effective grassroots efforts.

Corporate rate
The tax law permanently reduced the top corporate rate from 35 percent to a flat 21 percent, effective Jan. 1, 2018. C corporations may now fully deduct state and local taxes from their tax liability. And as advocated by ICBA, the law fully repeals the corporate alternative minimum tax, a supplemental income tax on corporations.

During the congressional debate, ICBA advocated the lowest possible tax rate for C corporation community banks, which will reduce the government-sponsored competitive advantage enjoyed by tax-advantaged credit unions and Farm Credit System lenders.

ICBA also supported the quickest possible effective date. The Senate-passed version of H.R. 1 had an effective date of Jan. 1, 2019. By moving the effective date up a year, Congress helped community banks mitigate any lost value of deferred tax assets.

Subchapter S rate
For Subchapter S community banks, qualified business income is eligible for a 20 percent deduction. Lowering the top marginal income rate to 37 percent and allowing the 20 percent deduction equates to a top rate of 29.6 percent—a meaningful decrease for pass-through businesses. The law also allows shares of Sub S banks held in trusts and estates to get the 20 percent pass-through deduction.

Steadfast ICBA advocacy and community bank grassroots engagement were instrumental in establishing greater parity between S and C corporation community banks, and ensuring the 20 percent deduction was available to trusts and estates. Early House and Senate proposals provided inadequate tax relief for Subchapter S banks, and we worked hard to ensure lawmakers made needed changes. ICBA’s grassroots campaign on this issue generated thousands of contacts to key lawmakers.

Business interest deduction
Protecting the business interest deduction was a major ICBA focus going into the tax reform debate, with an ICBA white paper, op-ed campaign, and direct and grassroots lobbying emphasizing the issue. The hard work paid off.

Under the Tax Cuts and Jobs Act, businesses with gross annual receipts of $25 million or less will continue to deduct their interest expense in full. Businesses above this threshold will be limited to deducting net interest expense of no more than 30 percent of “adjusted taxable income” or earnings before interest, taxes, depreciation and amortization. Banks will not be directly affected, because the limitation applies only to net interest expense.

The law also exempts many lines of real property business from any limitation on interest deduction. In addition, farming businesses may elect not to be subject to the above limitation on deducting interest.

Overall, Congress largely preserved a fundamental tenet of the nation’s tax code: allowing businesses to deduct from their tax bill the interest on their loans.

Non-qualified deferred compensation
Non-qualified deferred compensation plans are widely used by community banks to supplement the pension incomes of key employees. The House and Senate bills originally included a provision that would have effectively ended deferred compensation (which is often funded by bank-owned life insurance) by taxing it as soon as it is vested. Following ICBA and community banker advocacy, this harmful provision was removed from both bills.

Mortgage interest deduction
Following ICBA advocacy, the tax law largely maintains the mortgage interest deduction. While earlier versions of the legislation would have dramatically reduced the deduction, lawmakers ultimately agreed to limit it to interest paid on the first $750,000 of acquisition debt on a first or a second home. The law also suspends the deduction for interest on home equity lines of credit until 2026.

Other provisions
Estate tax: While the law does not repeal the tax, as advocated by ICBA, it doubles the estate tax exemption. The higher exemption level is indexed to inflation but will expire at year-end 2025.

Interest on private activity and municipal bonds: As requested by ICBA, the tax law preserves the tax exemption for newly issued private activity bonds.

New markets tax credit: ICBA also supported keeping the new markets tax credit, a critical tool for ensuring that economic growth reaches low-income urban and rural communities. As advocated by ICBA, it was preserved.

Community bank impact
Some tax-policy challenges remain following the passage of the Tax Cuts and Jobs Act, such as the effect of the lower corporate tax rate on deferred tax assets (DTA) and the inability of Congress to curtail the taxpayer subsidies given to credit unions and Farm Credit System lenders. However, the Financial Accounting Standards Board and federal regulators have taken steps to address the DTA impact, while Senate Finance Committee chairman Orrin Hatch (R-Utah) has begun speaking out against the credit union tax exemption.

Overall, community banks have benefited greatly from the reform, and many have already begun passing on the savings. For instance, First Financial Northwest Inc. in Renton, Wash., started off the new year with a special $1,000 after-tax bonus to all non-executive employees. “The expected tax savings give us an opportunity to invest even more in our team,” president and CEO Joseph Kiley III said in a news release announcing the surprise bonuses.

Likewise, OceanFirst Financial Corp. in Toms River, N.J., announced that it was increasing its hourly minimum wage within 30 days of enactment of the law, giving a raise to more than 135 OceanFirst Bank employees. Other community banks used the tax savings to boost their charitable giving, with Gulf Coast Bank & Trust Co. in New Orleans announcing a 50 percent increase in funds for its Community Rewards Program.

ICBA thanks the nation’s community bankers for their persistent grassroots outreach on tax reform, which had a dramatic impact on the debate. Community bankers have truly made a difference that will benefit the community banking industry and provide needed relief to local communities nationwide for years to come.

The road to tax reform

April 2016: ICBA deeply engages in tax reform process
April 2017: ICBA community bankers discuss tax reform with House Ways and Means Committee members during ICBA Capital Summit
January 2017: ICBA launches Plan for Prosperity regulatory and tax relief platform
Aug. 22, 2017: ICBA releases white paper with principles for tax reform
Sept. 27, 2017: Trump administration lays out tax reform framework
Sept. 29, 2017: ICBA launches op-ed campaign on tax reform priorities
Oct. 19, 2017: ICBA urges lawmakers to ensure maximum rate for pass-through entities applies to Subchapter S community banks
Nov. 6, 2017: House Ways and Means Committee takes up tax reform legislation
Nov. 16, 2017: House passes tax reform bill
Dec. 1, 2017: ICBA’s tax reform grassroots campaign generates thousands of contacts to key lawmakers
Dec. 4, 2017: Senate advances tax reform with ICBA-led improvements
Dec. 7, 2017: ICBA lays out remaining concerns with tax reform legislation in letter to conference committee
Dec. 14, 2017: Congress announces tax reform agreement
Dec. 19, 2017: House and Senate pass Tax Cuts and Jobs Act
Jan. 1, 2018: Tax law takes effect

John Hand ( is ICBA first vice president of congressional relations.
Alan Keller ( is ICBA first vice president of legislative policy.