Saying Goodbye to the Corporate AMT
Over the last few years as some community banks have had trouble growing loans and have been managing increased deposits by expanding their investment portfolios, we have seen an increasing number of financial institutions paying the corporate alternative minimum tax (AMT). The new tax bill will eliminate the AMT starting in 2018 and will make it easier for these institutions to evaluate and manage their investment portfolios.
Historically, the corporate AMT resulted in a minimum level of tax, at a 20% tax rate, that larger businesses were required to pay. The tax paid under the AMT would become a credit that was essentially on deposit with the IRS until the corporation generated enough “regular” income tax at which point the credit could be claimed.
Financial institutions were particularly prone to paying the alternative minimum tax because most tax exempt bond and loan income as well as income from bank owned life insurance (BOLI) was treated as taxable under the AMT system. As a result, some institutions have struggled to manage their alternative minimum tax level and their overall investment mix in recent years.
Starting in 2018, the alternative minimum tax will be completely eliminated for corporations. Corporations with existing AMT credit carryforwards will begin receiving refunds of those credits towards their regular tax liability. For 2018, the amount that can be claimed may be up to 50% of the credits outstanding if certain conditions are met.
More importantly, institutions will be free to manage their investment portfolios without the complexity of the AMT, which many result in some institutions holding more tax exempt investments. However, institutions will want to carefully analyze the tax equivalent yield on their investments in light of the new 21% corporate tax rate, which will mean fewer dollars of tax savings for each dollar of tax exempt income.
CLA is here to help. Our financial institution team can assist you in analyzing your tax liability in light of the new tax bill.
Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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