Two Things in Accounting Life Are Certain: Taxes and CECL

As we begin to look to the end of the year and think about taxes, have you thought about the impact of CECL on taxes? In this session at the National CECL Conference, Heather Wallace and Will Neeriemer of DHG discussed CECL and taxes. Here are some of the takeaways from the session.

Often a tax professional is the last person to be brought into the CECL discussion, though there are tax implications relative to multiple loan accounting items. It is critical to have representation of a tax expert on your CECL committee, or at least someone to pull in when tax issues arise.

Deferred tax assets and liabilities are created when there is a difference between the GAAP basis and the tax basis carrying amounts of assets and liabilities. In general, the allowance is recognized for GAAP purposes before being deducted for tax purposes. The difference in timing between the GAAP deduction and the tax deduction produces a deferred tax asset.

Book method for expensing:

• Charge-offs and recoveries are recorded directly to the allowance.
• The provision is recorded to expense based on the estimated losses to be reserved.
• Charge-offs are recorded when amounts are deemed noncollectable.

Tax method for expensing:

• Charge-offs are allowed when collection is no longer being pursued.
• The tax deduction is calculated as a direct charge-off, by the experience method, or as a fair value adjustment.

It is important to track the difference from a tax standpoint or you might miss a deduction. You do get a deduction for the part of the loan you’re charging off. Use the reports from your allowance software to keep track of tax assets and liabilities.

You can deduct for losses during the year for direct charge-offs. If you have a loss asset for regulatory purposes, you can have a loss asset for tax purposes. Institutions with assets of less than $500 million can use historical experience to determine losses. Fair value adjustment accelerates deductions, but is not seen often because it is too difficult to calculate; some banks saw fair value as less than carrying value. It could be an easier calculation under CECL.

How do you get deferred taxes for acquired loans? In a tax-free transaction, keep the tax basis and record deferred taxes for fair value adjustments. For loans acquired in an asset purchase, record a stepped-up basis dependent on assigned fair value. Typically there are no deferred taxes for purchases recorded as asset purchases.

For HTM securities there are strict rules about taking losses for tax purposes. You might have a deferred tax liability, might have to start looking to defer taxes on HTM securities.

Because CECL is not impacting a future source of income, the adjustment will go to the beginning balance of retained earnings, net of tax, not the P&L.

CECL comes with many tax implications, including increasing the deferred tax and the deferred tax income.

The Tax Cut and Jobs Act, effective as of 2018, will include a flat corporate rate of 21 percent and reduced individual rates as well as a deduction for certain individuals earning pass-through income. It eliminates net operating loss carrybacks in exchange for indefinite carryforwards.

Opportunities include fair value election on loans, bad debt conformity, charge-offs, interest and original issue discounts. You can come off a conformity election to speed up deductions, based on facts and circumstances tests. You can incorporate an experience method to accelerate deductions to reduce the impact of CECL tax increases. For your 2017 return you still have a unique opportunity to accelerate deductions and opportunities to help manage your tax liability down the road.

Tax reform is beneficial to banks. One big opportunity is the pass-through provision. Banks were exempted from the limits of deductibility of interest expenses, but the elimination of deductibility for interest by customers may result in reduced borrowing.

Many thanks to Heather Wallace, Will Neeriemer and DHG.

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About the Presenters

Will Neeriemer, CPA  |  Partner  |  DHG Financial Services

Will Neeriemer is a Partner in the DHG Financial Services practice. Will has more than 18years of experience in providing attest and advisory services to financial institutions. His experience includes clients ranging in size from one branch local banks to multi-state regional banks. Will has extensive experience with the accounting and auditing issues related to mergers and acquisitions, mortgage banking and tax accounting.

Will has presented on multiple topics at industry events and training sessions, and he is a frequent content contributor to the firm’s knowledge share initiative. Will currently serves as the Professional Practice Partner for the Financial Services group, where he is a resource on complex accounting and auditing matters for all the financial services group engagement teams; he is also the lead of the CECL implementation team for DHG’s Financial Services Group. He has a passion for finding and sharing best practices to improve his clients’ performance and effectiveness.

Heather Wallace, CPA  |  Tax Partner  |  DHG Financial Services

Heather has more than 15 years of experience in corporate taxation. She focuses on providing accounting and consulting services for clients in the banking and financial services industry. Heather provides a number of advisory services including income tax accounting outsourcing and consultation, OneSource Tax Provision software implementation, state tax planning, development of best business practices, and federal and state tax compliance.

Prior to joining DHG, Heather held management positions in large U.S. publicly traded corporations and at a Big Four accounting firm. She was the Tax Director of a Top 20 financial institution, where she oversaw income tax accounting, regulatory reporting and all other aspects of the tax function. Heather has managed the implementation of OneSource Tax Provision and other tax transformation initiatives within a large regional financial institution.

Heather holds a Master of Accountancy and a Bachelors in Accounting from the University of Alabama.