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Tax planning strategies for
year-end

11.01.18

It’s that time of year. Kids have gone back to school, the leaves are changing color, the air is getting crisp and… year-end tax planning strategies are front of mind! It’s time to revisit or start tax planning for the coming year-end, and year-end purchase of capital equipment and the associated depreciation expense are often an integral part of that planning.

The Tax Cuts and Jobs Act (TCJA) expanded two prevailing types of accelerated expensing of capital improvements: bonus depreciation and section 179 depreciation. They each have different applications and require planning to determine which is most advantageous for each business situation.

100% expensing of selected capital improvementsbonus depreciation

Originating in 2001, bonus depreciation rules allowed for immediate expensing at varying percentages in addition to the “regular” accelerated depreciation expensed over the useful life of a capital improvement. The TCJA allows for 100% expensing of certain capital improvements during 2018. Starting in 2023, the percentage drops to 80% and continues to decrease after 2023. In addition to the increased percentage, used property now qualifies for bonus depreciation. Most new and used construction equipment, office and warehouse equipment, fixtures, and vehicles qualify for 100% bonus depreciation along with certain other longer lived capital improvement assets. Now is the time to take advantage of immediate write-offs on crucial business assets. 

TCJA did not change the no dollar limitations or thresholds, so there isn’t a dollar limitation or threshold on taking bonus depreciation. Additionally, you can use bonus depreciation to create taxable losses. Bonus depreciation is automatic, and a taxpayer may elect out of the bonus depreciation rules.

However, a taxpayer can’t pick and choose bonus depreciation on an asset-by-asset basis because the election out is made by useful life. Another potential drawback is that many states do not allow bonus depreciation. This will generally result in higher state taxable income in the early years that reverses in subsequent years.

Section 179 expensing

Similar to bonus depreciation, section 179 depreciation allows for immediate expensing of certain capital improvements. The TCJA doubled the allowable section 179 deduction from $500,000 to $1,000,000. The overall capital improvement limits also increased from $2,000,000 to $2,500,000. These higher thresholds allow for even higher tax deductions for business that tend to put a lot of money in a given year on capital improvements.

In addition to these limits, section 179 cannot create a loss. Because of these constraints, section 179 is not as flexible as bonus depreciation but can be very useful if the timing purchases are planned to maximize the deduction. Many states allow section 179 expense, which may be an advantage over bonus depreciation.

Bonus Depreciation Section 179
Deduction maximum N/A $1,000,000 for 2018
Total addition phase out N/A $2,500,000 for 2018


Both section 179 and bonus depreciation are crucial tools for all businesses. They can reduce taxable income and defer tax expense by accelerating depreciation deductions. Please contact your tax advisor to determine if your business qualifies for bonus depreciation or section 179 and how to maximize each deduction for 2018.

Section 179 and bonus depreciation: where to go from here

Both section 179 and bonus depreciation are crucial tools for all businesses. They can reduce taxable income and defer tax expense by accelerating depreciation deductions. Please contact your tax advisor to determine if your business qualifies for bonus depreciation or section 179 and how to maximize each deduction for 2018.

Related Services

If you received PPP funds, read on.

The Treasury has released new information regarding Paycheck Program Protection forgiveness. 

Based on IRS guidance, if you intend to apply for forgiveness and have a reasonable expectation it will be granted, the expenses used to support forgiveness will not be permitted as a deduction in 2020. It is unclear whether this guidance would apply if a taxpayer is undecided with regard to their forgiveness application at year end. Here is what we know so far.

The CARES Act included provisions that stated PPP loan forgiveness would not be considered taxable income under the Internal Revenue Code (“IRC”). The CARES Act specifically provides the forgiveness is not taxable income under IRC Section 61.

However, the IRS has issued the following guidance on this matter, which relates to the expenses paid with the PPP loan funds.

Notice 2020-32, states IRC Section 265(a)(1) applies to disallow expenses that were included on and supported a taxpayer’s successful PPP loan forgiveness application. 

In general, this section states NO deductions are permitted for expenses that are directly attributable to tax exempt income. 

The IRS seems to have concluded, in this Notice, the PPP loan forgiveness is tax exempt income. Therefore, the salary and occupancy costs used to support forgiveness, under current IRS guidance, will not be tax deductible.

Unanswered questions

This notice, while somewhat informative, raises many unanswered questions. For example, what are the tax consequences if a PPP loan is forgiven in 2021 and the expenses supporting the forgiveness were incurred in 2020? Could the forgiveness be construed as something other than tax exempt income?

Revenue Ruling 2020-27 attempts to answer some of these questions and provides additional guidance with regard to IRS expectations. The Ruling seems to indicate there are two possible tax positions relative to expenses that qualify PPP loans for forgiveness:

  • First, the loan forgiveness could be construed as tax exempt income and, pursuant to IRC Section 265 expenses directly attributable to the exempt income are not deductible.
  • Second, loan forgiveness could be construed as the reimbursement of certain expenses, and not as tax exempt income. Under the reimbursement approach the IRS has stated if you intend to apply for forgiveness and reasonably expect to receive forgiveness the reimbursed expenses are not deductible, even if forgiveness is obtained in the following tax year. This position seems to be supported by several tax controversies which were litigated in favor of the IRS. 

Some taxpayers had anticipated using a rule known as the tax benefit rule to deduct expense in 2020 and report a recovery (income) in 2021 when the loan is forgiven. It appears the IRS is not willing to accept this filing position.

We are hoping Congress will revisit this issue and consider statutory changes which allow for the deduction of expenses. Some taxpayers are planning to extend their income tax returns, taking a wait and see approach, with the hopes Congress will amend the statutes and allow for a deduction.

Under current law, it appears the salary, interest, rent used to support a forgiveness application will not be permitted as a tax deduction on your 2020 tax returns. This could result in a significant change in your 2020 taxable income.

Final considerations

For estimated tax payment purposes, we believe it would be reasonable to attribute the lost deductions to the quarter in which you made your final determination to file for forgiveness. This could mitigate any underpayment of estimated income tax penalties. 

If you are making safe harbor quarter estimates and/or have sufficient withholdings any incremental tax would be due with your return on April 15, 2021. Generally, the IRS safe harbor is to pay 110% of prior year tax during the current year to be penalty proof.

If you have questions about your specific situation, please contact us. We’re here to help.

COVID-19 business support

We will continue to post updates as we uncover them. Let us know if you have questions. For more information regarding the Paycheck Protection Program, the CARES Act, or other COVID-19 resources, see our COVID-19 Resource Center.

Article
Update: Treasury issues a revenue ruling and revenue procedure regarding PPP forgiveness

Read this if you are a renewable energy developer, installer, or investor.

After months of back-and-forth negotiations, renewable energy incentives remain in the November 3, 2021 version of the Build Back Better Act (Act). For renewable energy companies, that’s good news. In summary, Subtitle F – Green Energy of the Act, includes the proposal to extend and expand existing clean energy tax incentives included in Section 45 and Section 48 for renewable energy facilities that begin construction between 2021 and 2027. Here are current regulations and proposed changes:

Renewable Energy Investment Credit (IRC SEC 48)

  • Under current regulations the Investment Tax Credit (ITC) program, set to expire in 2024, offers a 26% tax credit for systems installed between 2020 and 2022 and a 22% credit for those installed in 2023.
  • The proposed regulation is to reinstate the 30% credit through year 2026 for the majority of the current green energy sources covered AND expand credit to include energy storage technology.
  • The rate phase down in 2027 & 2028 is a 2% base rate or a bonus rate of 10% thereafter.
  • Additionally, Section 48 is amended to include interconnection property in connection with the installation of energy property which has a maximum net output of not greater than 5 megawatts.

Renewable Energy Production Credit (IRC SEC 45)

  • Under the current regulations the Production Tax Credit (PTC) for wind facilities is 2.5 cents per kilowatt-hour and is due to expire on January 1, 2022. 
  • The proposed regulation for facilities with a maximum output of less than one megawatt of electricity, extends the section 45 credit for electricity produced from certain renewable resources, through December 31, 2026, phasing down to 80% of the applicable rate in 2027, & 60% of the applicable rate in 2028.

Details on the rates for projects placed in service after December 31, 2021 through the end of 2026.  

For the ITC, the provision provides a base credit rate of 6% of the basis of energy property or a bonus credit rate of 30% of the basis of energy property. Regarding the PTC, for most facilities the Act provides a base credit rate of 0.5 cents/kilowatt hour, or a bonus credit rate of 2.5 cents/kilowatt hour. In order to claim the credit at the bonus credit rate, taxpayers must satisfy:

  1. prevailing wage requirements for the duration of the construction of the project and for five years after the project is placed into service, and
  2. apprenticeship requirements during the construction of the project.

It is important to note that the prevailing wage rate must remain in effect throughout the construction period and for five years after the project is placed in service. The apprenticeship requirement only applies during the construction period.

Failure to satisfy requirements: Penalties

There are significant penalties in the event the taxpayer uses the bonus rate and fails to satisfy the prevailing wage and apprenticeship requirements. The taxpayer must make a payment to each laborer for the difference between the wages paid and the prevailing wage plus 3% interest. Additionally the taxpayer must pay the Secretary of Agriculture (Secretary) a penalty of $5,000 for each laborer paid below the prevailing wage rate. If it is found that the taxpayer intentionally used a wage rate below the prevailing rate the penalty increases to $10,000 per laborer paid below the prevailing rate.

The Act also provides for a 10% increase in the energy credit for solar and wind facilities placed in service in a low-income community (as defined in the New Markets Tax Credit program under section 45D). The 10% increase is subject to an annual capacity limitation of 1.8 gigawatts for each calendar year 2022 through 2026. 

An additional 20% credit for the solar ITC for a solar facility placed in service in as part of a low-income economic benefit project installed on a residential rental building, if at least 50% of the financial benefits of the electricity produced by such facility are provided to households with income of less than 200% of the poverty line.

Each credit would include a direct pay option, allowing the credit to be treated as equivalent to a payment of a tax refundable if it exceeds taxes otherwise payable. This ensures that the taxpayer does not need a tax liability to benefit from the credit currently.

The taxpayer must elect to treat the applicable credit as tax payments for the taxable year in which the qualified facility is originally placed in service after December 31, 2021. The election must be made by the taxpayer no later than the due date of the return, including properly filed extensions, but not earlier than 270 days after enactment. Once the election is made it is irrevocable. 

However, it remains unclear whether the direct pay amount would be equal to the full amount of the credit otherwise claimable or whether it would be “hair cut” in a way similar to the proposed Growing Renewable Energy and Efficiency Now Act (GREEN Act), H.R. 848. Ideally, if the direct pay is “hair cut,” the direct payment due would be 85% of the total credit otherwise claimable. Certain developers would be able to forego tax equity investments and instead settle on self-funding or debt financing, including short-term bridge financing secured by the future tax refund and/or long-term project financing.

Should the direct pay option include a “haircut,” the more practical choice would be tax equity, especially if the developer cannot otherwise currently utilize depreciation deductions from the project or interest deductions from the debt.

If you have any questions, please contact the Renewable Energy team. We’re here to help.

Article
Current Build Back Better Act and incentives for renewable energy

Read this if you are a solar developer, installer or investor.

Much of the focus in the renewable energy space has been on the commercial Investment Tax Credit (ITC), due to the size of the projects and the money involved. Certainly the nuances of passive vs. active income and basis limitations drive a lot of the conversation about investing in a large scale project. But what about the residential credit? In some ways the residential credit is simpler, but many questions remain. Here we explain some of the differences and things unique to the residential credit to hopefully clear up some of your questions.

Where can the project be located?

Per the regulations for the residential ITC, the solar-energy producing equipment needs to be located on a “home” owned by the taxpayer. This is important because it does not say “primary residence”, but “home”. So the project could be on your primary residence, or it could be on your vacation home on Cape Cod. The important thing here is that the property is used as a “home”, or residence. If you are putting the solar project on a rental property then that would fall into the commercial ITC category, not the residential.

When can I claim the credit?

The credit is claimed on the tax return for the year the project is placed in service. Being placed in service is defined as being operational for its intended purpose—so in other words, not only does it need to be installed, it has to be turned on and operating. Some projects get stuck in the inspection queue at year end and don’t get approved until after the first of the next year. If that happens to you, unfortunately your credit will need to be claimed on the next tax return. Unlike the commercial ITC, there is no provision for a safe harbor for the credit. If you don’t reach full installation and operation by December 31, 2022 then you are only eligible for the 22% credit instead of the 26% credit you would have gotten if the project was completed in 2022. 

What costs qualify?

Only the costs for equipment that is integral to the production of energy qualify for the credit. This includes panels, racking, and inverters, but can also include some other costs, depending on the circumstances. It does not include improvements and enhancements to your roof that are not directly related to the production of energy. This tends to be a bigger issue on commercial projects where the added weight of the equipment and the slope of the roof require additional work to be done. However, a skylight added to your roof is not part of the solar energy equipment, and the cost of that addition should be excluded from your total cost, even though it may be helping to make your home more energy efficient. The cost of replacing a roof does not qualify, but in certain cases upgrades to the roof can be included.

What about depreciation?

Depreciation is the annual expensing of a commercial asset. Since the project is on your home, there is no depreciation expense to claim. Instead, the cost of the energy equipment installed on your house becomes part of your cost basis, or original purchase value, of your house. In the future if the house is sold, this cost will help reduce the amount of taxable gain on the sale.

What about storage?

Battery storage has been a part of renewable energy projects for years, but as the technology gets better and more cost effective it is becoming a bigger part of project offerings. Currently, a battery storage system is only eligible for the residential ITC if it is installed at the same time as the energy-producing equipment. This is the same for both the residential and commercial credit. In addition to being installed as part of the original project cost, the battery must also be charged by the renewable energy-producing equipment. If it draws a charge from the grid or from another non-renewable energy source, it will not qualify for the ITC.

We have been watching the activity in Washington, D.C. carefully since President Biden took office. One of the items in the proposed tax bill is an expansion of the Investment Tax Credit to allow for stand-alone energy storage equipment to qualify. While this is still in discussion and no legislation has passed yet, this change to the rules could potentially allow for battery storage to be added to existing projects, and the taxpayer taking the ITC on the cost of adding the battery storage equipment. 

Every project, home, and taxpayer’s situation is different, so it is important to discuss your individual project and tax situation with your tax advisor. As we have described here, the residential and commercial ITCs are similar, but not the same. However, both have the potential of being beneficial to the taxpayer, and perhaps at a greater level to environment.

Article
Residential Investment Tax Credits: Answers to some common questions 

Read this if you paid wages for qualified sick and family leave in 2021.

The IRS has issued guidance to employers on year-end reporting for sick and family leave wages that were paid in 2021 to eligible employees under recent federal legislation.

IRS Notice 2021-53, issued on September 7, 2021, provides that employers must report “qualified leave wages” either on a 2021 Form W-2 or on a separate statement, including:

  • Qualified leave wages paid from January 1, 2021 through March 31, 2021 (Q1) under the Families First Coronavirus Response Act (FFCRA), as amended by the Consolidated Appropriations Act, 2021 (CAA).
  • Qualified leave wages paid from April 1, 2021 through September 30, 2021 (Q2 and Q3) under the American Rescue Plan Act of 2021 (ARPA).

The notice also explains how employees who are also self-employed should report such paid leave. This guidance builds on IRS Notice 2020-54, issued in July 2020, which explained the reporting requirements for 2020 qualified leave wages.

Employers should work with their IT department and/or payroll service provider as soon as possible to review the payroll system, earnings codes configuration and W-2 mapping to ensure that these paid leave wages are captured timely and accurately for year-end W-2 reporting.

FFCRA and ARPA tax credits background

In March 2020, the FFCRA imposed a federal mandate requiring eligible employers to provide paid sick and family leave from April 1, 2020 to December 31, 2020, up to specified limits, to employees unable to work due to certain COVID-related circumstances. The FFCRA provided fully refundable tax credits to cover the cost of the mandatory leave.

In December 2020, the CAA extended the FFCRA tax credits through March 31, 2021, for paid leave that would have met the FFCRA requirements (except that the leave was optional, not mandatory). The ARPA further extended the credits for paid leave through September 30, 2021, if the leave would have met the FFCRA requirements.

In addition to employer tax credits, under the CAA, a self-employed individual may claim refundable qualified sick and family leave equivalent credits if the individual was unable to work during Q1 due to certain COVID-related circumstances. The ARPA extended the availability of the credits for self-employed individuals through September 30, 2021. However, an eligible self-employed individual may have to reduce the qualified leave equivalent credits by some (or all) of the qualified leave wages the individual received as an employee from an employer.

Reporting requirements to claim the refundable tax credits

Eligible employers who claim the refundable tax credits under the FFCRA or ARPA must separately report qualified sick and family leave wages to their employees. Employers who forgo claiming such credits are not subject to the reporting requirements.

Qualified leave wages paid in 2021 under the FFCRA and ARPA must be reported in Box 1 of the employee’s 2021 Form W-2. Qualified leave wages that are Social Security wages or Medicare wages must be included in boxes 3 and 5, respectively. To the extent the qualified leave wages are compensation subject to the Railroad Retirement Tax Act (RRTA), they must also be included in box 14 under the appropriate RRTA reporting labels.

In addition, employers must report to the employee the following types and amounts of wages that were paid, with each amount separately reported either in box 14 of the 2021 Form W-2 or on a separate statement:

  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of Section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA)1  with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Emergency family leave wages paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), and (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
  • The total amount of qualified family leave wages paid to the employee under the EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: Emergency family leave wages paid for leave taken after March 31, 2021, and before October 1, 2021.”

If an employer chooses to provide a separate statement and the employee receives a paper 2021 Form W-2, then the statement must be included with the Form W-2 sent to the employee. If the employee receives an electronic 2021 Form W-2, then the statement must be provided in the same manner and at the same time as the Form W-2.

In addition to the above required information, the notice also suggests that employers provide additional information about qualified sick and family leave wages that explains that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income.

For more information

If you have more questions, or have a specific question about your particular situation, please call us. We’re here to help.

 1Employees are eligible for qualified sick leave under EPSLA if the employee:

  • Was subject to a federal, state or local quarantine or isolation order related to COVID-19;
  • Had been advised by a health-care provider to self-quarantine due to concerns related to COVID-19;
  • Experienced symptoms of COVID-19 and was seeking a medical diagnosis;
  • Was caring for an individual who was subject to a quarantine order related to COVID-19, or had been advised by a health-care provider to self-quarantine due to concerns related to COVID-19;
  • Was caring for a son or daughter of such employee, if the school or place of care of the son or daughter had been closed, or the child-care provider of such son or daughter was unavailable, due to COVID-19; or
  • Was experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

Article
IRS guidance to employers: Year-end reporting requirements for qualified sick and family leave wages

Read this if you are a community bank.

The Federal Deposit Insurance Corporation (FDIC) recently issued its second quarter 2021 Quarterly Banking Profile. The report provides financial information based on Call Reports filed by 4,951 FDIC-insured commercial banks and savings institutions. The report also contains a section specific to community bank performance. In second quarter 2021, this section included the financial information of 4,490 FDIC-insured community banks. BerryDunn’s key takeaways from the community bank section of the report are as follows:

  • There was a $1.9 billion increase in quarterly net income from a year prior despite continued net interest margin (NIM) compression. This increase was mainly due to higher net interest income and lower provision expenses. Net interest income had increased $1.4 billion due to 1) lower interest expense, 2) higher commercial and industrial (C&I) loan interest income, and 3) loan fees earned through the payoff and forgiveness of Paycheck Protection Program (PPP) loans. Provision expense decreased $2.3 billion from second quarter 2020. However, it remained positive at $46.1 million. For non-community banks, provision expense was negative $10.8 billion for second quarter 2021.
  • Quarterly NIM declined 26 basis points from second quarter 2020 to 3.25%. The average yield on earning assets fell 57 basis points to 3.57% while the average funding cost fell 31 basis points to 0.32%. Both of which are record lows.
  • Net operating revenue (net interest income plus non-interest income) increased by $1.6 billion from second quarter 2020, a 6.5% increase. This increase is attributable to higher revenue from service charges on deposit accounts (increased $134.8 million, or 23.5%, during the year ending second quarter 2021) and an increase in “all other noninterest income,” including, but not limited to, bankcard and credit card interchange fees, income and fees from wire transfers, and income and fees from automated teller machines (up $203.6 million, or 9.3%, during the year ending second quarter 2021).
  • Non-interest expense increased 7.8% from second quarter 2020. This increase was mainly attributable to salary and benefit expenses, which saw an increase of $688.2 million (7.8%). That being said, average assets per employee increased 8.4% from second quarter 2020. Non-interest expense as a percentage of average assets declined 18 basis points from second quarter 2020.
  • Noncurrent loan balances (loans 90 days or more past due or in nonaccrual status) declined by $894.6 million, or 7.1%, from first quarter 2021. The noncurrent rate improved 5 basis points to 0.68% from first quarter 2021.
  • The coverage ratio (allowance for loan and lease losses as a percentage of loans that are 90 days or more past due or in nonaccrual status) increased 39.8 percentage points year-over-year to 191.7%, a record high, due to declines in noncurrent loans. This ratio is well above the financial crisis average of 64.5%. The coverage ratio for community banks is 15.4 percentage points above the coverage ratio for non-community banks.
  • Eighty-eight community banks had adopted current expected credit loss (CECL) accounting as of second quarter. Community bank CECL adopters reported negative provision expense of $208.3 million in the second quarter compared to positive $254.5 million for community banks that have not yet adopted CECL.
  • Net charge-offs declined 8 basis points from second quarter 2020 to 0.05%. The net charge-off rate for consumer loans declined most among major loan categories, having decreased 51 basis points.
  • Trends in loans and leases showed a slight decrease from first quarter 2021, decreasing by 0.5%. This decrease was mainly seen in the C&I loan category, which was driven by a $38.3 billion decrease in PPP loan balances. The decrease in PPP loans was driven by the payoff and forgiveness of such loans. Despite the decrease in loans quarter-over-quarter, total loans and leases increased by $5.7 billion (0.3%) from second quarter 2020. The majority of growth was seen in commercial real estate portfolios (up $61.7 billion, or 8.9%), which helped to offset the decline in C&I, agricultural production, and 1-4 family mortgage loans during the year.
  • Two-thirds of community banks reported an increase in deposit volume during the second quarter. Growth in deposits above the insurance limit, $250,000, increased by $47.8 billion, or 4.7%, while alternative funding sources, such as brokered deposits, declined by $3.8 billion, or 6.7%, from first quarter 2021. 
  • The average community bank leverage ratio (CBLR) for the 1,789 banks that elected to use the CBLR framework was 11%.
  • The number of community banks declined by 38 to 4,490 from first quarter 2021. This change includes two new community banks, 12 banks transitioning from community to non-community banks, one bank transitioning from non-community to community bank, 27 community bank mergers or consolidations, and two community bank self-liquidations.

Second quarter 2021 was another strong quarter for community banks, as evidenced by the increase in year-over-year quarterly net income of 28.7% ($1.9 billion). However, tightening NIMs will force community banks to find creative ways to increase their NIM, grow their earning asset bases, or find ways to continue to increase non-interest income to maintain current net income levels. Some community banks have already started dedicating more time to non-traditional income streams, as evidenced by a 4.3% year-over-year increase in quarterly non-interest income. The importance of the efficiency ratio (non-interest expense as a percentage of total revenue) is also magnified as community banks attempt to manage their non-interest expenses in light of declining NIMs. Banks appear to be strongly focusing on non-interest expense management, as seen by the 18 basis point decline from second quarter 2020 in non-interest expense as a percentage of average assets, although inflated balance sheets may have something to do with the decrease in the percentage.

Furthermore, much uncertainty still exists. For instance, although significant charge-offs have not yet materialized, the financial picture for many borrowers remains uncertain. And, payment deferrals have made some credit quality indicators, such as past due status, less reliable. Payment deferrals for many borrowers are coming to a halt. So, the true financial picture of these borrowers may start to come into focus. The ability of community banks to maintain relationships with their borrowers and remain apprised of the results of their borrowers’ operations has never been more important. This monitoring will become increasingly important as we transition into a post-pandemic economy. For seasonal borrowers, current indications, such as the most recent results from the Federal Reserve’s Beige Book, show that economic activity was relatively strong over the summer of 2021. However, supply chain pressures and labor shortages could put a damper on the uptick in economic activity for these borrowers, making a successful transition into the “off-season” months that much more important. 

Also, as offices start to open, employers will start to reassess their office needs. Many employers have either created or revised remote working policies due to changing employee behavior. If remote working schedules persist, whether it be full-time or hybrid, the demand for office space may decline, causing instability for commercial real estate borrowers. Recent inflation concerns have also created uncertainty surrounding future Federal Reserve monetary policy. If an increase in the federal funds target rate is used to combat inflation, community banks could see their NIMs in another transitory stage.

As always, please don’t hesitate to reach out to BerryDunn’s Financial Services team if you have any questions.

Article
FDIC Issues its Second Quarter 2021 Quarterly Banking Profile

Read this if you are interested in tax policy and infrastructure.

The Biden Administration has made tax policy a legislative priority, and the Treasury Department’s Green Book released in May provides additional details on these tax policy proposals. Congressional Democrats have also indicated their interest in tax legislation. The question is: Will we see federal tax legislation in the near future? To answer this question, we need to look at the Administration’s and Congress’ infrastructure legislative plans.

Infrastructure one

President Biden has been negotiating an infrastructure package with members of both parties. Although a bipartisan agreement fizzled in July, new life seems to have been breathed into a new agreement. During the week of July 26, 2021, the Senate reached bipartisan agreement on a $1 trillion package that includes roads, bridges, rail, airports, electric vehicles, clean water, and broadband internet, with revenue offsets such as new cryptocurrency information reporting requirements and an excise tax on chemicals. On August 10, 2021, the Senate voted 69 to 30 to pass the bill.

House consideration of the package is expected in coming weeks. Some progressive Democratic members of the House, however, have indicated that they may not vote in favor of this package unless a far larger second infrastructure package is ultimately approved.

This first infrastructure package is reportedly “paid for” outside income tax increases, which means that this infrastructure bill generally would not include the Administration’s tax proposals. There would likely be little to no Republican support for the package if the Administration’s tax priorities were included.

There does, however, continue to be strong interest by the Administration in moving forward with its tax policy priorities. That’s where a second infrastructure package comes in.

Infrastructure two

A second infrastructure package, referred to in the press as “human infrastructure,” is intended to address more intangible priorities, such as extension of the child care tax credit, healthcare, immigration and climate change. It is expected that the Administration’s and Congress’ tax policy priorities would be included in this bill. At this time, this estimated $3.5 trillion package does not enjoy bipartisan support. The package would be expected to pass the House, as House rules require only a simple majority for passage. Its path through the Senate, however, remains unclear.

In general, legislation needs only a simple majority to pass the Senate. Under current Senate rules, any senator may filibuster a piece of legislation, which amounts to unlimited speech and debate and, if unstopped, can effectively derail legislation. However, if 60 senators agree, they may vote to invoke “cloture,” which will end the filibuster and move the legislation to a substantive vote. (Cloture was invoked for Infrastructure One by a 67-33 vote.) It is expected that a second infrastructure bill would not pick up any Republican Senate votes, and there likely would be a Republican filibuster. Without any Republican support, cloture would be virtually impossible. 

There is, though, a procedural option available in the Senate to bypass the filibuster/cloture rules. Under the “budget reconciliation” process, legislation can pass the Senate with a simple majority without the threat of filibuster. While the budget reconciliation process also applies in the House, because there is no filibuster threat, the House does not need the procedure to advance legislation to a simple majority vote. 

Reconciliation bills must involve spending, revenue, or debt. There is a limit to the number of bills that may pass the Senate under budget reconciliation each year. The American Rescue Plan enacted in March 2021 utilized the budget reconciliation process to pass the Senate. The Senate parliamentarian has indicated that additional reconciliation bills may pass the Senate this year. Despite further availability of the budget reconciliation process in the Senate this year, passage of Infrastructure two is not a foregone conclusion. 

For a bill to pass the Senate under the budget reconciliation process, it needs only to garner a simple majority of votes, which, with the current Senate makeup, means 50 Democrats voting in favor, plus a 51st vote cast by Vice President Harris. There are, however, moderate Democratic senators who have indicated in recent weeks that they may not be willing to use the budget reconciliation process to advance any further legislation, at least in the short term.  

Nonetheless, on August 11, 2021, the Senate approved a budget resolution on party lines; this budget resolution will serve as the framework with which Infrastructure two will be considered on its merits. House Speaker Pelosi previously indicated that the House will not vote on a first infrastructure bill until the Senate takes procedural steps regarding Infrastructure two, so this crucial step makes the future of both packages brighter in both chambers of Congress.

Likelihood of a 2021 tax bill?

Infrastructure two is expected to be the vehicle in which tax policy priorities are included. With passage of the budget resolution in the Senate, this step certainly makes the prospects of ultimate passage much better. What remains unclear is what the underlying provisions will look like, as there remains some discomfort on the part of some moderate senators with its $3.5 trillion price tag.

All eyes are focused on two moderate Democratic senators: Kyrsten Sinema of Arizona and Joe Manchin of West Virginia. While Sinema has been instrumental in helping to reach a bipartisan deal on Infrastructure one, she indicated the week of July 26, 2021 that she does not currently support the price tag of the second bill. Manchin has also indicated displeasure with the bill’s cost. Without the support of both senators, a second bill would likely stall.

There is still plenty of time on the legislative calendar for negotiation and minds to change. Some issues members of Congress will consider are the price tag of any second infrastructure bill, whether they want to be the sole detractor within their party and whether there may be opportunity to address the policy issues in future legislation. 

Timing of a possible tax bill?

Although Congress is expected to take up consideration of Infrastructure two in the fall, whether it ultimately passes and what provisions it will contain is unclear. Senators Sinema and Manchin are two to watch over the coming weeks. 

What would be included?

The Green Book is a good starting point to understand the Administration’s tax policy priorities. Congress will have its priorities as well. If we do see tax legislation, some major provisions that can be expected to be included in a bill include increases in the corporate tax rate, individual tax rates, and capital gains rates, as well as estate tax changes and changes to international tax policy.

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2021 federal tax legislation? A review of the state of play

Read this if you are interested in renewable energy policy.

The Senate has voted to approve a $1.2 trillion infrastructure bill. You can read the text of the Infrastructure Investment and Jobs Act here. While the bill faces an uncertain future in the House, it provides us with some insight on a possible bipartisan priority for future renewable energy tax incentives: Electric Vehicles (EVs).

The infrastructure bill provides grant funding for expanding EV charging stations. If enacted this may lead to more charging stations across the country, making it easier for people to own an EV, especially for those without the ability to charge their vehicle efficiently at home. The infrastructure bill also provides funding for electric bus funding. Including these EV provisions in the infrastructure bill raises the question of whether new tax incentives for owning one will be introduced, or current incentives expanded in future legislation, to further boost EV purchases. 

The current Federal Section 30D tax credit (New Qualified Plug-In Electric Drive Motor Vehicles) for electric vehicles has been around for some time, originally effective for 2009. The credit is available for businesses and individuals, and is worth a base amount of $2,500 on a new vehicles purchase plus an additional amount based on battery capacity up to $5,000, capping the total credit at $7,500. The credit has a number of limitations, one of the most significant being that once an EV manufacturer exceeds 200,000 units sold the credit phases out for that manufacturer’s vehicles over the next year. As of August 2021, Tesla and General Motors vehicles no longer qualify for the credit, with Toyota not far behind. These manufacturers of popular EVs and consumers alike would welcome an expanded tax credit to remove the cap on number of vehicles sold. 

Another limitation of the Federal Section 30D tax credit is a limitation on size. Once an electric vehicle exceeds 14,000 pounds of gross vehicle weight rating it is no longer eligible for the credit. This excludes many larger business fleet vehicles such as buses from the credit. The funding for electric bus implementation in the infrastructure bill signals a possible shift in priorities to inclusion of larger vehicles in future tax credits. 

While the Infrastructure bill has no expansion of federal tax credits for electric vehicles, the inclusion of funding for EV charging stations and electric buses points towards EVs being a priority for the current administration, which has also signaled support for them in the past. Stay tuned for future legislative updates on federal tax incentives for electric vehicles. 
 

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Infrastructure bill puts focus back on electric vehicles

Read this if you are a timber harvester, hauler, or timberland owner.

The USDA recently announced its Pandemic Assistance for Timber Harvesters and Haulers (PATHH) initiative to provide financial assistance to timber harvesting and hauling businesses as a result of the pandemic. Businesses may be eligible for up to $125,000 in financial assistance through this initiative. 

Who qualifies for the assistance?

To qualify for assistance under PATHH, the business must have experienced a loss of at least 10% of gross revenue from January, 1, 2020 through December 1, 2020 as compared to the same period in 2019. Also, individuals or legal entities must be a timber harvesting or timber hauling businesses where 50% or more of its revenue is derived from one of the following:

  • Cutting timber
  • Transporting timber
  • Processing wood on-site on the forest land

What is the timeline for applying for the assistance?

Timber harvesting or timber hauling businesses can apply for financial assistance through the USDA from July 22, 2021 through October 15, 2021

Visit the USDA website for more information on the program, requirements, and how to apply.
If you have any questions about your specific situation, please contact our Natural Resources team. We’re here to help. 

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Temporary USDA assistance program for timber harvesters and haulers