During his speech to the Joint Session of Congress, President Trump proposed reinstating full expensing for depreciable assets purchased or constructed, effective retroactively to the first day of his presidency, January 20, 2025. While this is a strong indication of intent and agenda, any actual legislative change will require Congressional action, a process that remains slow, complicated, and politically fraught—even with full Republican control. This article will examine how such a proposal could impact banks, and why the details of any potential future legislation will be important.
Branch Acquisitions
When banks look to expand, there are some situations where, rather than doing a whole bank acquisition, Buyer Bank will purchase branches from Target Bank – either due to Target Bank withdrawing from a geographic area, or, in some cases, where Target Bank itself has made an acquisition but must sell off some of the acquired branches to meet regulatory requirements.
In such a branch acquisition, Buyer Bank typically acquires certain assets of Target Bank branches and assumes deposit liabilities. Typically, where the liabilities assumed exceed the assets acquired (net liabilities), Buyer Bank effectively “pays” a premium in that Target Bank transfers cash to Buyer Bank in an amount less than the net liabilities assumed by Buyer Bank.
In connection with the transaction, the Asset Purchase Agreement will typically provide for a purchase price allocation for income tax purposes. Both Buyer Bank and Target Bank must complete Form 8594 to reflect the purchase price allocation. After allocating the purchase price, any residual premium is treated as goodwill and amortized over 15 years for income tax purposes. To the extent that full expensing returns, and is allowed for used assets, any purchase price allocation to qualifying depreciable assets could presumably be recovered in year one for Federal tax purposes. Qualifying assets are usually fixed assets with a depreciation life of 20 years or less.
Estimated Tax Payments
For banks considering large fixed asset purchases, either for normal operations, or as part of expanding leasing activity, the return of full expensing will impact cash taxes paid and thus estimated tax payments (ES). Typically the first quarter ES payment is based on the lesser of tax on three months’ income or 25% of the prior year tax liability under what is known as the 3-3-6-9 method (note that one of two alternative time periods, 2-4-7-10 or 3-5-8-11, may be elected if done by April 15, 2025, for a calendar year corporation, on Form 8842).
However, if full expensing has not been enacted by March 31, 2025 (which is likely given the time frame needed for both Houses of Congress to pass a reconciliation bill including resolving any differences in Conference), it is prudent that the benefit of full expensing not be factored into the first quarter’s ES payment. If a bank has elected the 3-5-8-11 alternative time period, and full expensing is enacted by May 31, 2025, the benefit could be factored into the second quarter ES payment.
Impact on Lending Operations
The return of full expensing for qualifying assets would of course benefit loan customers of the bank by reducing the cash flow needed for those customers to pay federal income tax (although it should be noted that many states will not follow the full expensing for state income tax return purposes). And full expensing for tax purposes can impact a customer’s lease vs buy decision.
Next Steps
As noted above, the devil will be in the details— will full expensing be enacted, will it be retroactive to January 2025, will it be allowed for all assets or just manufacturing assets, and will it be allowed for existing, used assets?
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss the above matters further.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
