While no application to the banking agencies is required, the new tax structure has supervisory implications. The new tax structure has some potential draw-backs. These benefits are potentially substantial and may increase the inherent value of community banks. The most important of these requirements are that the company not use the reserve method of accounting for bad debts for tax purposes and that it have 75 or fewer eligible shareholders. To be able to receive the benefits for tax year 1997, institutions therefore may need to act quickly since changes in either of the above areas may be time consuming.
Reserve accounting for bad debts for tax purposes is an issue affecting only smaller institutions.
Presumably, the IRS will not object to any such change, which can delay deductions and increase taxable income, and will allow the change to be effective as of the beginning of the tax year. Number of Eligible Institutions While exact figures on the number of eligible institutions are not available, the number of small banks may provide insight into where the tax election may be seen. It is expected that a large percentage of these companies would meet the eligibility requirements. The earnings of the corporation generally are not taxed at the corporate level but pass directly to shareholders' personal income. As such, cash distributions to shareholders are not subject to an additional layer of taxation, which results in a reduction in overall taxes.