Shifting incentives: the impact of the Tax Cuts and Jobs Act on S bank conversions

Abstract

Purpose

This paper investigates the significant increase in S corporation banks converting to C corporations following the 2017 Tax Cuts and Jobs Act (TCJA) and the shift in motivations behind these conversions.

Design/methodology/approach

The paper uses bank-level panel data from Federal Deposit Insurance Corporation (FDIC) Call Reports to analyze the determinants of S bank conversions after the TCJA, comparing post-TCJA conversion trends with pre-TCJA trends utilizing an ordinary least squares (OLS) and logistics model.

Findings

The study finds that post-TCJA conversions are primarily driven by financially stable banks seeking improved tax conditions and relaxed shareholder restrictions as C corporations. This contrasts with pre-TCJA conversions, which were predominantly driven by financially distressed S corporation banks seeking new equity capital to maintain solvency.

Research limitations/implications

The findings necessitate a comprehensive reconsideration of the Subchapter S status' sustained relevance for smaller institutions, especially in light of the comparative benefits now offered by the C corporation status post-TCJA. The results underscore the importance of ongoing academic investigation to deepen the understanding of the evolving fiscal landscape's effects on community banks, thereby contributing to the knowledge of the resilience and health of the US economy.

Practical implications

This research nudges policymakers and regulators to contemplate the ongoing relevance and advantages of the S corporation status. Given the substantial benefits conferred by the C corporation status in the post-TCJA environment, this study suggests that retaining the S corporation status may not offer the same appeal for smaller community banks as it once did.

Originality/value

This paper contributes to the broader understanding of the impact of tax policy on businesses' organizational choices, particularly in the banking industry and emphasizes the need for a comprehensive review of the S corporation status to assess its ongoing applicability in fostering small and community-focused financial institutions in light of the evolved corporate tax landscape.

Citation

Nguyen, C., Pacheco, A. and Stone, R. (2023), "Shifting incentives: the impact of the Tax Cuts and Jobs Act on S bank conversions", Managerial Finance, Vol. 49 No. 12, pp. 1964-1978. https://doi.org/10.1108/MF-05-2023-0286