Requirements for banks after reaching $500M asset threshold

Increased bank consolidation and considerable stimulus funds provided by governments in response to the COVID-19 pandemic have resulted in significant asset growth for community banks. Many banks have recently crossed or are nearing the $500MM asset threshold that subjects financial institutions to several new requirements. If your bank asset size is $500MM as of the first day of the fiscal year, you will be required to have the following (if not already required by applicable state laws):

  • Audited comparative financial statements with Independent Auditor’s Report thereon
  • Management report that contains:
    • A statement of management’s responsibilities for:
      • Preparing the annual financial statements
      • Establishing and maintaining an adequate internal control structure over financial reporting
    • An assessment by management of the Bank’s compliance with laws and regulations pertaining to insider loans and dividend restrictions during the year
  • Audit firm must be independent under SEC/ PCAOB independence standards
  • Majority of audit committee members must be outside directors that are independent of management
  • Part 363 Annual Report with the FDIC and primary regulator within 120 days after the bank’s fiscal year end
  • Management is required to prepare the financial statements, including disclosures, and tax accrual

Audited financial statements

Banks must have their audits completed within 120 days after the bank’s fiscal year end, unless the bank is publicly traded resulting in a 90-day or sooner requirement.

Auditor independence

Banks and their audit firm are required to follow SEC/ PCAOB independence standards including partner rotation every five years (unless firm is not subject to requirement), pre-approval of non-audit services and certain restrictions on banks hiring auditors from the engagement team. In connection with auditor independence, audit firms are not able to provide prohibited nonaudit services to the bank such as:

  • Bookkeeping,
  • Financial statement preparation (including tax accruals),
  • Valuations,
  • Outsourced internal audits,
  • Tax return preparation for individuals in a financial reporting oversight role (or their family members), and
  • Financial information systems design and implementation

Audit committee composition

Banks are required to have an audit committee to oversee financial reporting. Most of the audit committee members must be outside directors rather than members of management to avoid potential conflicts of interest. There should be direct communication between the audit committee and auditor.

How we can help

Maggart’s approach is tailored to your bank’s size and complexity. We will build relationships with your management team to develop a practical solution that can be scaled as you grow and your bank’s requirements change. We can help you with the following:

  • Financial statement preparation
  • Financial statement audits
  • Loan review services
  • Internal audits
  • Investment center review
  • Asset liability management assessments
  • Liquidity and funds management assessments
  • HUD audits
  • Risk assessment services
  • Outsourced accounting
  • Merger & Acquisition consulting
  • Process redesign and optimization plans
  • Policies and procedures development
  • Strategic planning
  • Information security assessments
  • Asset liability management assessments
  • Liquidity and funds management assessments
  • State collateral pool certifications

Why Maggart?

  • We take a hands-on approach in helping you planning (typically 18-24 months in advance) to ensure you meet the FDICIA requirements in a cost effective and efficient manner.
  • You will receive useful insights from a relationship-based firm with national firm expertise. Maggart has been providing services to banks ranging from small privately held community banks to publicly traded multi-billion-dollar institutions for over 40 years.
  • When applicable, we will provide documentation or equivalent in accordance with AICPA standards to your audit firm and other outside service providers to maximize efficiency and minimize staff disruption in meeting requirements.
  • You will be assigned a partner that is intimately involved in the relationship from day one. We won’t assign unsupervised inexperienced staff to you.

The importance of an independent loan review

The greatest level of risk to a bank’s balance sheet generally resides in its loan portfolio. An effective loan review function will help your bank manage credit risk by identifying, monitoring, and addressing credit quality issues in an accurate and timely manner. An effective credit management system should work to ensure the accuracy of internal credit classification or grading systems and, thus, the quality of the information used to assess the appropriateness of your bank’s allowance for loan losses or allowance for credit losses. The scope and complexity of your bank’s loan review system should vary based on the size and complexity of your institution. The approach should be adaptable to changes in local and broader markets conditions.

With today’s level of regulatory oversight, there is increased focus on having a quality, independent loan review program. Most community banks find it challenging or cost prohibitive to handle internally.

How We Can Help

Maggart’s approach is tailored to your bank’s size and complexity. We offer:

  • Full scope loan reviews
  • Limited/targeted scope loan reviews
  • Due diligence loan reviews
  • Outsourced or co-sourced loan review to supplement or enhance your current loan review department

We build relationships with your credit administration team to develop a practical solution that will help you:

  • Assess individual loans and repayment risks
  • Identify lapses in loan documentation
  • Determine compliance with approved lending policies and procedures
  • Evaluate credit and underwriting quality
  • Identify opportunities to improve your bank’s lending function
  • Validate the accuracy of your bank’s risk ratings
  • Find opportunities to improve your bank’s lending function
  • Identify and communicate market trends and conditions that could impact your portfolio

Our Loan Review Approach

We will provide you with a report that summarizes your bank’s risk characteristics, documentation exceptions, and includes various graphs and peer group comparisons. The report will allow your management team and Board of Directors to further understand the risk profile of your loan portfolio. We’ll also provide risk rating recommendations about individual loans and loan relationships as well as opportunities to improve your underwriting and credit administration policies and procedures.

Why Maggart?

  • We take a hands-on approach to our loan review to ensure you stay well-informed of regulatory issues and industry trends.
  • You will receive useful insights from a relationship-based firm with national firm expertise. Maggart has been providing services to small privately held community banks to publicly traded multi-billion-dollar institutions for over 40 years.
  • We will complete your review in a timely and efficient manner to ensure that you maintain your good standing with regulators.
  • Our services go beyond providing loan review — our team is a partner with you. We will provide you with recommendations, sample policies, templates, or other materials to help you take improve your credit risk management practices.
  • We will provide documentation or equivalent in accordance with AICPA standards to your audit firm to maximize efficiency and minimize staff disruption.
  • You will be assigned a partner that is intimately involved in the relationship from day one. We won’t assign unsupervised inexperienced staff to you.

Here are some things gig economy workers should know about their tax responsibilities

Many people take up gig work on a part-time or full-time basis, often through a digital platform like an app or website. Gig work, such driving a car for booked rides, selling goods online, renting out property, or providing other on-demand work, is taxable and must be reported as income on the worker’s tax return.

Here are some things gig workers should know to stay on top of their tax responsibilities:

Pay your taxes as you go
If you earn a paycheck as a gig economy employee, your employer usually withholds
tax from your pay to help cover taxes you owe. If you’re a gig economy worker who’s not
considered an employee, two ways you can help cover your taxes are:

  • Fill out and submit a new Form W-4 for other jobs where you work as an employee.
  • Make quarterly estimated tax payments to help pay your taxes throughout the year, including self-employment tax.

Keep good records
The IRS requires you to keep adequate proof of income and expenses. Some gig companies
will track some of this information for you and send you a W-2, 1099-MISC or a 1099-K at
the end of the year. Even if they don’t, it’s important that you keep track of all your income
and expenses to report on your tax return.

Check your tax payments
A Paycheck Checkup using the IRS Withholding Estimator can help you see if you should
make additional tax payments to avoid an unexpected tax bill or underpayment penalty
when you file your tax return. This is especially important if you:

  • Have multiple jobs – especially if you don’t have each employer withhold taxes.
  • ƒExpect to pay self-employment tax.

Benefits of Filing Your Tax Return Early

They say the early bird gets the worm. Early federal income tax filers may get a couple worms, which is a good thing in this metaphor.

Although it may seem like a quaint tradition to wait until the deadline (usually April 15, but actually April 18 in 2022), there’s more than one valid reason for getting your return completed and submitted well before this date. But you have to have the necessary documents to do so.

Prevent Identity Theft

In one tax identity theft scheme, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund. The real taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year.

While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund. Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected, not yours.

Get an Earlier Refund

Another reason to file early is you may put yourself closer to the front of the line to receive your tax refund (if you’re owed one). The IRS website still indicates that it expects to issue most refunds for the 2021 tax year within the usual 21 days, despite the massive pandemic-related delays that affected millions of 2020 tax returns.

The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account. Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

Look for Your Documents

To file your tax return, you need your Form W-2s (if you’re an employee) and Form 1099s (if you’ve worked as an independent contractor or “gig worker”). January 31 is the deadline for employers to issue 2021 Form W-2s to employees and, generally, for businesses to issue Form 1099s to recipients of any 2021 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for assistance.

Don’t Wait!

As of this writing, some taxpayers may still be waiting to receive their 2020 federal income tax refunds. A few people (mostly on social media) have floated the idea of refusing to file their 2021 income tax returns until they receive their refund. Is this a good idea?

No, it’s not. Failing to file your return will only lead to bigger headaches later, possibly even penalties and criminal prosecution. Plus, if you’re owed a 2021 refund, you may receive that money before your 2020 refund. But the only way to get it is to file!

If you have questions or would like an appointment to prepare your return, please contact us. We can help you ensure you file an accurate return that takes advantage of all the breaks available to you.

Businesses Can Still Deduct 100% of Restaurant Meals

Business owners, 2022 is well underway. So, don’t forget that a provision tucked inside 2020’s Consolidated Appropriations Act suspended the 50% deduction limit for certain business meals for calendar years 2021 and 2022. That means your business can deduct 100% of the cost of business-related meals provided by a restaurant.

A Closer Look

As you may recall, previously you could generally deduct only 50% of the “ordinary and necessary” food and beverage costs you incurred while operating your business. Now you can deduct your full eligible costs.

What’s more, the legislation refers to food and beverages provided “by” a restaurant rather than “in” a restaurant. So, takeout and delivery restaurant meals also are fully deductible.

Remember the Rules

Some familiar IRS requirements still apply:

  • The food and beverages can’t be lavish or extravagant under the circumstances.
  • The meal must involve a current or prospective customer, client, supplier, employee, agent, partner or professional advisor with whom you could reasonably expect to engage in the due course of business.
  • You or one of your employees must be present when the food or beverages are served.

Entertainment expenses still aren’t deductible, but meals served during entertainment events can be deductible if charged separately. If food or beverages are provided at an entertainment activity, further rules apply.

More Information

Also be aware that, in November of last year, the IRS issued guidance on per diems related to the temporary 100% deduction for restaurant food and beverages. Contact us for further details about when you can deduct meal expenses.

Could Your Company Reap Tax Benefits From a Heavy SUV Purchase?

Many businesses need to invest in heavy sport utility vehicles (SUVs) to transport equipment and provide timely services. Fortunately, they may be able to claim valuable tax deductions for the purchases. If you’re thinking about buying one (or if your bought one in 2021), be sure to brush up on the tax rules.

Bonus Depreciation

Under current law, first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service during the tax year. New and pre-owned heavy SUVs, pickups and vans acquired and put to business use in 2021 or 2022 are potentially eligible for 100% first-year bonus depreciation.

Be aware that this generous tax break is scheduled to begin to be reduced for vehicles that are acquired and placed in service after December 31, 2022. That’s added incentive to invest in a heavy SUV this year.

The 100% first-year bonus depreciation write-off will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state income tax deduction, too.

Weight and Use Requirements

100% bonus depreciation is available only if the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door where the door hinges meet the frame.

Another requirement is that you must use the vehicle more than 50% for business. If your business use is between 51% and 99%, you can deduct that percentage of the cost in the first year the vehicle is placed in service.

Detailed, contemporaneous expense records are essential in case the IRS challenges your business-use percentage. So, keep track of the miles you’re driving for business purposes, compared to the vehicle’s total mileage for the year. Record keeping is easier today because of the many mobile apps designed for this purpose.

You could also simply keep a handwritten calendar or mileage log in your vehicle and record details as business trips occur. Maintaining contemporaneous records is critical; calendars or logs compiled after the fact may not withstand IRS scrutiny.

The Right Moves

Did you purchase an eligible vehicle and place it in service in 2021? Or are you considering doing so in 2022? Consult with us to help evaluate the right business tax moves.

Tracking Down Donation Substantiation

If you’re like many Americans, letters from your favorite charities may be appearing in your mailbox acknowledging your 2021 donations. But what happens if you haven’t received such a letter? Can you still claim a deduction for the gift on your 2021 income tax return? It depends.

What’s Required?

To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation if it’s cash. If the donation is property, the acknowledgment must describe the property, but the charity isn’t required to provide a value. The donor must determine the property’s value.

“Contemporaneous” means the earlier of the date you file your tax return or the extended due date of your return. So, if you donated in 2021 but haven’t yet received substantiation from the charity, it’s not too late (as long as you haven’t filed your 2021 return). Contact the charity and request a written acknowledgment.

Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value and the charity is required to provide you a written acknowledgment as described earlier.

Deduction for Non-Itemizers

Generally, taxpayers who don’t itemize their deductions (and instead claim the standard deduction) can’t claim a charitable deduction. But, under the CARES Act, individuals who didn’t itemize deductions could claim a federal income tax write-off for up to $300 of cash contributions to IRS-approved charities for the 2020 tax year.

Fortunately, the Consolidated Appropriations Act extended this tax break to cover $300 of cash contributions made in 2021. The law also doubled the deduction limit to $600 for married, joint-filing couples for cash contributions made in 2021.

Let Us Assist You

Additional substantiation requirements apply to some types of donations. We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2021 income tax return. We also can guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2022 return.

Gig Workers, an Estimated Tax Deadline Is Approaching

If you’re a gig worker or otherwise self-employed, and you don’t have taxes withheld from a paycheck, you likely have to make quarterly estimated tax payments to the IRS. Be advised that the fourth quarter 2021 estimated tax payment deadline for individuals is coming up on Tuesday, January 18, 2022.

The Pay-As-You-Go System

If you do have some withholding from paychecks or payments you receive but you receive other types of income such as Social Security, prizes, rent, interest and dividends, you may still have to make estimated payments. And if you fail to make the required payments, you may be subject to a penalty as well as interest.

Generally, you need to make estimated tax payments for 2021 if you expect withholding to be less than the smaller of 90% of your tax for 2021 or 100% of your 2020 tax. (The applicable amount is 110% of your 2020 tax if your 2020 adjusted gross income was more than $150,000, or $75,000 if married filing separately.)

Sole proprietors, partners and S corporation shareholders generally must make estimated tax payments if they expect to owe $1,000 or more in tax when filing a tax return.

Quarterly Due Dates

If you’re new to estimated tax payments, be prepared to submit them throughout the year. The due dates are typically April 15, June 15, September 15, and January 15 of the following year. However, if the date falls on a weekend or holiday, the deadline is the next business day.

Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher, or by credit or debit card.

Tax Payments for Seasonal Businesses

Most individuals make estimated tax payments in the four installments. You simply determine the required annual payment, divide the number by four and make four equal payments by the due dates.

However, you may be able to make smaller payments during some quarters under an “annualized income method.” This can be useful to people whose income isn’t uniform over the year, perhaps because of a seasonal business. You may also want to use the annualized income method if a large portion of your income comes from capital gains on the sale of securities that you sell at various times during the year.

Finding the Correct Amount

Estimated tax payments are just like paying a traditional tax bill in that you want to fulfill your obligation without overpaying the federal government. Contact Maggart with any questions you may have about setting up estimated tax payments or using the annualized income method.

Budgeting for Your New Baby

Babies bring joy and excitement. They also bring substantial adjustments to the family budget! According to U.S. News and World Report, after adjusting for inflation, it costs about $267,233 in 2021 dollars to raise a baby to age 18 (based on previously published Bureau of Labor Statistics data). That’s a daunting number, to be sure. Fortunately, there are some things you can do to pacify the challenge.

Check Your Insurance

Life and disability insurance are critical. Life insurance provides financial protection if an income-earner in your family dies. Term insurance can be a cost-effective option. It offers protection for a specific period, such as 20 years (at which point many children will be relatively self-sufficient, and the loss of income less harmful). Of course, you’ll also need to ensure that your will names a guardian to look after your children in case of your death while they’re still minors.

Disability insurance provides financial protection if a breadwinner becomes disabled and no longer can earn a living. While some employers offer disability insurance, the policies often don’t provide enough income to cover all expenses. And Social Security disability benefits might not offer the protection you expect. For instance, to obtain the benefits, the breadwinner typically must be unable to work at any job. So, consider purchasing your own policy that will pay if you can’t continue in your current job. The distinction might make a difference.

Review Tax Breaks

Eligible parents can receive a valuable Child Tax Credit. And if you pay a caregiver to watch your baby so you can work, you may be able to claim the dependent care credit. For 2021, depending on your income, this can be up to 50% of eligible childcare expenses, up to $8,000 for one child, or $16,000 for two or more. The caregiver typically can’t be a dependent, your spouse or a parent of the child.

Another option is a dependent care Flexible Spending Account (FSA). This is an employer-sponsored program that allows parents to set aside up to $10,500 (for 2021) pretax annually (up to $5,250 if you’re married and file separately) to cover qualified childcare expenses. It’s important to note that you can’t use both the credit and the FSA for the same expenses.

Start Saving for College Early

The sooner you start saving for your baby’s education, the more you can leverage the value of compounding. If you save $200 per month starting at your baby’s birth and earn a 6% return, you’ll have nearly $78,000 in 18 years!

One of the best options, potentially, is a Section 529 education savings plan. It allows you to save for college expenses, as well as K-12 tuition expenses. Contributions aren’t tax-deductible for federal purposes, but many states offer tax benefits. Withdrawals used for qualified education expenses (limited to $10,000 per year for K-12 tuition) aren’t subject to federal income tax, and typically not subject to state income tax.

Get Expert Advice

Whether you have a baby on the way or your family expanded earlier in the year, it’s important to make sure you’re taking the right steps to ensure your child’s financial security. Maggart can offer advice to help you evaluate various options and maximize your tax savings.

4 Ways to Withdraw Cash from a Corporation

Owners of closely held corporations often want or need to withdraw cash from the business. The simplest way, of course, is to distribute the money as a dividend. However, a dividend distribution isn’t tax-efficient because it’s taxable to the owner to the extent of the corporation’s earnings and profits. It also isn’t deductible by the corporation. Here are four alternative strategies to consider:

1. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation.

This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If there isn’t proper documentation or the debt-to-equity ratio is too high, the “debt” repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.

2. Compensation. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). This same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property.

In both cases, the compensation amount must be reasonable in terms of the services rendered or the value of the property provided. If it’s considered excessive, the excess will be a nondeductible corporate distribution (and taxable to the recipient as a dividend).

3. Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50%-owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50%-owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain.

A sale should be on terms that are comparable to those in which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.

4. Loans. You can withdraw cash tax-free from the corporation by borrowing money from it. However, to prevent having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or note. It should also be made on terms that are comparable to those in which an unrelated third party would lend money to you, including a provision for interest (at least equal to the applicable federal rate) and principal. Also, consider what the corporation’s receipt of interest income will mean.

These are just a few ideas. If you’re interested in discussing these or other possible ways to withdraw cash from a closely held corporation, contact us. We can help you identify the optimal approach at the lowest tax cost.