As the winds of change roar through Washington shifting the sands of the administration and congressional control, community financial institutions and small businesses are eagerly awaiting clarity on how their tax landscape may be impacted. Will the Tax Cuts and Jobs Act be extended beyond the current expiration date or more of its provisions made permanent?
How will the changes at the top impact regulatory pressures and some of the unexpected costs that have come along with them? Will some legislation improve tax positions while others reduce tax deductions? Let’s explore some of these areas and the potential impacts on community financial institutions and small businesses, while keeping in mind that every day changes are being announced that could shift the direction of the winds impacting us.
Tax Cuts and Jobs Act
In 2017, the first Trump administration passed the Tax Cuts and Jobs Act. While it impacted individuals, there were some major impacts for businesses. A bright spot of the legislation was creating Section 199A which temporarily allowed pass-through entities, such as S-Corporations, to deduct up to 20% of qualified business income on their individual tax returns.
Should the act be extended, S-corporations continue to receive this benefit. If it is allowed to expire and no additional legislation is passed, we could see a shift in business structure, especially since the corporate tax rate cut was permanent. Conversely, the legislation eliminated the entertainment deductions that allowed businesses to deduct 50% of the expenses directly related to business discussions. While businesses can still deduct 50% of business meal expenses correlating to business discussions, any accompanying activity considered entertainment no longer qualified. This increased sales and marketing expenses for many businesses.
The act also permanently lowered the corporate tax rate from a high of 35% to 21%, making C- Corp status more attractive to many businesses. However, many S-Corporations who gained the benefit of the qualified business income deduction were able to stay competitive with the lower corporate tax rate. The act also put new limits on deductions for business interest expenses, excess business loss and net operating loss.
Depreciation was a large part of the 2017 legislation. A major benefit it brought was for bonus depreciation, allowing businesses to deduct 100% of qualified property in the year it was placed in service. This benefit declined over time and now only allows for a 40% immediate deduction in 2025. Many community financial institutions use bonus depreciation because not all shareholders can benefit from large deductions created through the Section 179 deduction process vs. a more controlled percent deduction process.
For large investments, such as new branches or major remodels, institutions often engage Cost Segregation Services Teams, such as Forvis Mazars, to help build the best depreciation strategy available rather than use straight line depreciation. And, with the proper filings, strategies put in place can be changed, or reversed, should the tax landscape drastically change.
Regulatory Changes
One of the most potentially impactful changes that is happening from a regulatory standpoint is within the Consumer Financial and Protection Bureau (CFPB). Created out of the 2010 Dodd- Frank Wall Street Reform and Consumer Protection Act in the wake of the 2008 financial crisis, the original intent was to increase transparency and accountability in financial services, create fairness and competition in financial markets, make sure people could access financial products and services and hold financial institutions accountable.
The original intent was for the CFPB to have supervisory authority over financial institutions with assets over $10 billion, however regulations the organization has put in place has impacted financial institutions of every size either directly or through a competitive trickle-down effect.
Section 1071 of the Dodd-Frank Act has been one area of concern for many institutions. Originally, the intent was for institutions to compile, maintain and submit certain data points around race, gender, LGBTQI+ and ethnicity on loan applications, lines of credit, credit cards, etc. to the CFPB to ensure small business and women or minority-owned businesses were not facing discrimination. At the onset, this rule had positive intent, and institutions were only required to collect 13 data points, making it a manageable ask.
However, this evolved to 81 data points required to be captured and submitted to the CFPB at an estimated upfront cost of $45,000-$78,000 per institution with ongoing annual costs of as little as $8,000 to as much as $278,000 according to data from Ncontracts. While the implementation of 1071 has been delayed for some institutions due to a ruling by the Fifth Circuit Court of Appeals as of February 2025, the rule is still in effect for others.
This has ballooned into an unexpected expense for community financial institutions that keep them from being able to direct those funds to other needed resources such as cybersecurity investments and digital banking advancements for their customers. As we continue to watch the changing landscape in Washington, what happens with the CFPB will be on everyone’s radar in the financial services industry.
Inflation Protection Act
In 2022, Congress passed the Inflation Protection Act (IRA). Many community banks have been able to receive tax credits, and in some cases received accelerated depreciation for certain projects, through partnerships to fund green projects and deploy capital in underserved communities. While it was a 10-year plan originally, we are waiting to see what, if any, actions will be taken by the current administration.
These projects are long-term projects that many have invested large amounts of time and resources in and if there is a sudden claw back on this legislation it could have negative consequences. While Donald Trump vowed to roll back funding aimed at energy transition during the election, there are many parts of this legislation that benefit Republicans, which could keep it safe. But again, the winds are rapidly changing, so we need to be prepared for whichever way they may blow.
Strategic Planning
With all that is happening, at a rapid pace, solid strategic planning is more important than ever. A key area to ensure you have on your radar includes evaluating corporate structure as the tax environment shifts.
Should the Tax Cuts and Jobs Act be allowed to expire, the C-corporation structure may become more attractive to many S-corporations. Succession planning will remain an important part of your strategic planning process. Not just for leadership inside your institution, but also for board members and shareholders. Without strong succession plans in place, business continuity can be greatly impacted. If the next generation of shareholders isn’t identified and lined up, then a sudden loss of a shareholder could put the institution on the hook to unexpectedly raise the capital to buy back the shares. Looking at ways to diversify income streams should be an ongoing strategic discussion.
Whether it is strategic partnerships with Fintechs or adding lines of service like accounting, insurance and wealth management, continuing to think ahead to what the future will need and want can help keep you competitive, no matter what climate shifts happen. For now, we can only anticipate in what direction the wind may blow and be thinking strategically how different outcomes may impact the direction we face. Partnering with organizations that can help you think strategically and provide economies of scale with knowledge based on working with numerous institutions may be your best preparation for the change that is inevitably coming.