This year’s Bank Tax Institute was held in person in Orlando, Florida and was back at full attendance after the impact of COVID in recent years. The 2022 conference themes focused mainly on: (1) the midterm elections which took place the same week as the institute, (2) expected tax legislation, and (3) education for banks on the recently enacted Inflation Reduction Act, the emerging digital asset market, and the changing regulatory environment.
The Inflation Reduction Act of 2022 (IRA) was dissected into applicable impacts for players in the bank and capital markets space. The impact of revived alternative minimum tax on the largest banks is uncertain in the absence of IRS guidance on bank and lender adjustments to the calculation, including mortgage servicing contracts. The new 1% excise tax on stock buybacks discussion focused on who it applied to (banks who are traded on an exchange), and how to plan stock buybacks around the excise tax’s applicability threshold (netting against issuances, mergers, minimal exceptions).
Numerous sessions during the institute focused on how the mid-term elections and a potentially split Congress would affect future tax legislation for financial institutions and lenders. The sunsetting of prior tax provisions over the next few years – including the bonus depreciation phase-out, tax rate increases and research and development cost expensing – was presented. The speculation around potential immediate legislation was geared towards research and development expensing, excess loss limitations for smaller business operations, and the child tax credit.
Environmental, social and governance (ESG) reporting requirements and limitations were the subject of a Baker Tilly-sponsored roundtable. The discussion centered on how much public and private banks will be required to track and disclose regarding ESG policies and positions in future years. Best practices on establishing internal responsible parties, committees and policies were presented. The SEC’s status of reporting requirements, comment periods, and current legislation circulating at the state level were hot topics. Policies and reporting requirements of foreign countries were also discussed as U.S. requirements often lag European countries.
Holly Paz, the acting Large Business & Industry Division Commissioner of the IRS, spoke to the audience on the IRS’s new allotted funding under the IRA. She indicated that the IRS is focused on three main objectives: IRA transition and implementation, increased enforcement and significant technology upgrades. The Commissioner spoke about new and retiring enforcement campaigns, increasing employee count, and the continuance of the Pre-Filing Agreement and Fast Track Settlement programs. Paz also spent significant time informing banks of the upcoming revised Uncertain Tax Position schedules, indicating that disclosures historically have been insufficient form the IRS’s perspective. Companies will need to disclose more in-depth descriptions of their positions and indicate where the positions are specifically recorded by line on the tax return.
Economic indicator review in the banking, lending and investment markets was repeated at this year’s conference, but with a much higher level of uncertainly and volatility than in prior years. Robert Strand, the American Bankers Association’s Senior Economist, presented views on a potential recession, and the future direction of interest rates and how that will impact the financial services industry.. Tighter labor markets were examined, as well as the impact of rising interest rates on the value and volume of loan production.
While the majority of institutions remain well-capitalized and credit appears strong, the industry saw the impact of declining investment value on banks who did not elect the Other Comprehensive Income opt-out for investment securities in capital calculations. This is having a negative impact on the ability to close pending mergers and acquisition transactions. The decline in valuation is also having a detrimental effect on S corporation banks being able to dividend out enough earnings for shareholder tax payments. The industry is hoping for a second opportunity from the regulators to elect non-inclusion of investment value changes in capital calculations.
Conference breakout sessions were designed to educate bank leaders on the new era of digital assets. Bank involvement in digital assets as a product and service was explored, including the regulatory framework surrounding a traditional entity’s accounting and compliance requirements. Competition from non-bank lenders and brokers is bringing a new expectation into the traditional banking space for speed in transaction processing and lending, and new digital asset market offerings.
Employee retention credits were brought up several times during the conference due to heavy marketing towards banks. The strict qualification requirements, audit likelihood, and statute mismatches between payroll and income tax return were outlined. Guidance was provided for tax team leadership and bank executives to share with their bank management on how financial institutions can qualify under gross revenue decline tests or under suspension of operation tests.