Making Sense of Build Back Better For Banks
Build Back Better, the Biden Administration’s signature social spending bill, appears in limbo in its current form. But which tax proposals should banks and financial institution’s still have on their radar as we enter 2022?
In mid-November, the Biden administration celebrated the signing of the ambitious Infrastructure Investment and Jobs Act. Washington’s power brokers on the Democratic side of the aisle quickly turned their attention to Build Back Better.
Iterations of Build Back Better from earlier this year included plans to raise the corporate tax rate, end fossil fuel subsidies and increase the global minimum tax. Another funding proposal that got a lot of ink earlier this fall was the Biden administration’s plan to have the IRS require banks and credit unions to automatically provide information on their customers’ bank accounts.
Well, after months of political wrangling, it appears likely that many of those major provisions will not appear in the final bill, if some iteration of the bill even passes at all. The bill brings to mind that famous aphorism about the weather in my home region of New England – if you don’t like it, wait a minute because it’s likely to change.
If something makes its way back into the bill or is revisited at a later time, we need to be ready to jump as quickly as we can to help them comply with new tax laws and lessen their tax burden. First, let’s look at how we can help advise clients on policies that aren’t in the bill…for now:
IRS Mandate
Many of my clients in community banking are relieved that the IRS mandate appears to be out of the current bill. For smaller banks, the concern was compliance; making sense of and pulling together the necessary data for the IRS was going to be a real burden for some, especially around the end of the year when they are strapped to begin with. The hope for tax experts and our banking clients is that if an IRS reporting mandate returns at some point, there will be provisions to lessen the compliance burden and potentially software to help institutions pull together required data.
As for whether or not that day will come, I tell clients to never say “never.” The idea behind the mandate is to get a more accurate picture of individuals’ potential tax exposure. It’s a revenue raiser and has strong support from the Treasury Department, so it may be only a matter of time before the idea is revisited.
Corporate Rate Increase
A major hike to the corporate tax rate also appears to be out of the current bill. We as accounting professionals still need to communicate a note of caution to our clients in banking, since some kind of hike could still be a “pay-for” add-on near the end of negotiations if Congress needs something to make the numbers work. Even if it’s not an add-on to Build Back Better, it could certainly be part of future legislation.
So, those are a few headline-grabbing proposals that don’t appear to be in the bill, but what about what does? Just because some of the biggest, sweeping tax changes seem to be left out, there are still incremental changes that could impact those we serve.
Corporate Minimum Tax
The current proposal would include a 15 percent minimum tax on profits for corporations whose financial statement income exceeds $1 billion. This too doesn’t impact most banking and financial services clients; there are roughly 200 companies in the S&P 500 index that report more than $1 billion of income and even less would face the 15 percent minimum tax based on reported effective tax rates.
But if you work with one of these corporations or have a client that does business with them, it’s good to be aware that they may be facing federal tax liabilities they haven’t before. It’s not a small amount, by the way, with the White House estimating the provision would raise $325 billion in tax revenue in a decade.
Stock Buybacks
Banks that are publicly traded or listed on other securities markets may be impacted by Build Back Better’s proposed 1% excise tax on stock buybacks. In recent years, as the stock market has climbed, buybacks have become popular among companies that have the cash. While this provision isn’t one that appears to have too many companies tossing and turning at night, it certainly could make banks rethink their overall buyback strategy and is something to keep them apprised of.
Final Thoughts
So much remains up in the air with Build Back Better that it’s challenging to speculate too much about what may be in the final bill. It does seem safe to say the most sweeping changes for banks and financial institutions that were initially proposed will not be in the final bill. But we should still be preaching caution and the importance of taking a measured approach to our clients. Like a careful driver, let’s remind them: tax policies in the rearview mirror of this proposal may be closer than they appear.