Hatch Bill Proposes Tax Relief For State Banks

by Mike Godfrey, Tax-News.com, Washington

15 July 2008

United States Senator Orrin Hatch (R-Utah) has introduced legislation that would allow state-chartered banks, operating as limited liability companies (LLCs), to be subject to just one level of federal income tax, rather than the double taxation corporations face under the current law.

Commenting on his bill, introduced into the Senate on 11th July, Hatch argued that: “It is time that we modernize our tax system to correlate with our federal banking laws. It is unreasonable not to allow small banks to be taxed like other closely held businesses. We need to make sure that our community banks can provide the most capital...without an onerous second layer of tax.”

Hatch's home state of Utah and a growing number of other states allow financial institutions to be organized as limited liability companies. State laws governing LLCs permit businesses to be taxed as a partnership while maintaining the limited liability protection of a corporation.

In 2003, the Federal Deposit Insurance Corporation (FDIC) issued regulations allowing state-chartered banks operating as limited liability companies to receive deposit insurance. However, Hatch notes that the tax law continues to require banks organized as limited liability companies to be taxed as corporations, and he is of the view that these rules are obsolete and inconsistent with FDIC regulations.

According to Hatch, his bill will enable banks in Utah and other states to avoid double taxation and to attract more capital.

“Our tax system is too complicated and often interferes with the operation of our businesses. It is time we update our tax rules to create more jobs and improve our economy," he said.

Hatch’s bill has been endorsed by the Utah Bankers Association and the American Bankers Association.

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