Pub. 2 2012-2013 Issue 4

8 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S FEATURE ARTICLE “In today’s low-interest rate environment, even an increase of a few basis points in the taxable equivalent yield is beneficial.” Financial Institutions May Structure to Avoid Interest Expense Disallowance Rules T he Internal Revenue Code requires financial institutions, as defined, to allocate a por- tion of their interest expense to tax-exempt interest debt instruments held. The interest so allocated is a permanent difference between tax and book income and is never deduct- ible for federal income tax purposes. Con- sequently, as the maximum federal income tax rate is currently 35 percent, a potentially significant permanent tax savings opportunity exists if the amount of this disallowance can be reduced or eliminated. To the extent of the mitigation of the interest expense disallow- ance, the tax equivalent yield on the institu- tion’s tax-exempt obligations is increased. In today’s low-interest rate environment, even an increase of a few basis points in the taxable equivalent yield is beneficial. Interest expense disallowed is calculated using a statutory formula that incorporates tax-exempt securities and total assets. De- pending on the obligation, the disallowance is either 100 percent or 20 percent of the amount calculated. JOHN WRIGHT CPA BKD, LLP Q Disallowance Rules  continued on page 10