As the end of the year quickly approaches, we have important mortgage industry tax, audit, and financial statement updates to share.
TAX UPDATE
As we close out 2024, our focus has shifted from tax return preparation to preparing year-end tax planning.
And, with the presidential election having just been completed, we have been looking to what the future may hold regarding income taxes.
President Trump’s return to the White House after four years could mean significant changes throughout the U.S. legal and regulatory framework, and the impact on tax policy is no exception.
During the 2024 Presidential campaign, President-elect Donald Trump proposed new tax policies. Here are some common elements that might appear in a new tax proposal:
- Child Tax Credit: There’s a proposal to increase the Child Tax Credit to $5,000 per child, which would provide more financial relief for parents. Under current law, set to expire after 2025, the child tax credit is equal to $2,000 per qualifying child with phase outs for some taxpayers.
- No Taxes on Tips and Overtime: The plan includes exempting overtime pay and tipped income from taxes, which would particularly help workers in industries like hospitality.
- Corporate Taxes: The corporate tax rate would be reduced to 15% for businesses that manufacture goods in the U.S., aiming to encourage domestic production.
- Tariffs on Imports: There’s a suggestion to introduce a 10% tariff on all imported goods, and a much higher 60% tariff on imports from China, to support U.S. industries.
- State and Local Taxes: The cap on deductions for state and local taxes (SALT) would be removed or increased, which would benefit those in high-tax states.
President-elect Trump is also proposing to make the provisions of the Tax Cuts and Jobs Act (TCJA) permanent.
The Tax Cuts and Jobs Act (TCJA), signed into law by President Trump in December 2017, was a major tax reform package that made sweeping changes to both individual and corporate taxes in the United States.
Currently, the Tax Cuts and Jobs Act (TCJA) remains in place today, though some were designed to be temporary. And we approach 2025 – the year when several provisions for individuals are set to expire.
The TCJA provided the following:
Individual Tax Rates
Individual income tax rates were lowered across most tax brackets, with the highest rate reduced from 39.6% to 37%. These cuts are set to expire in 2025.
Standard Deduction and SALT Cap
The standard deduction was nearly doubled (from $6,350 to $12,000 for singles, from $12,700 to $24,000 for married couples, unadjusted for inflation) and the State and Local Tax (SALT) deduction was capped at $10,000.
Corporate Tax Rate
The corporate tax rate decreased from 35% to 21%.
Pass-Through Business Deduction
Created a 20% deduction on qualified income for pass-through businesses (e.g., LLCs and S-corps) to benefit small businesses and freelancers.
Estate Tax
The estate tax exemption was raised to about $11.2 million per individual ($13.6 million for 2024, adjusted for inflation), meaning fewer estates owed this tax.
AUDIT UPDATE
HUD Reporting Issues
- Net Operating Loss Reporting Requirement: Just a reminder (and hopefully this isn’t an issue this year) that if you have an operating net loss in any quarter greater than 20% of the previous quarter’s equity, this must be reported to HUD through the LEAP system. This is for any given quarter during 2024. There will be no audit finding if the loss is reported, but we will have to issue an audit finding if the loss was not reported.
- LEAP Filing Changes: Last year was the first year using the new LEAP filing methodology. Overall, it didn’t go as poorly as expected, but please be reminded that the dual authentication is here to stay. All this really means is that there will be a little more coordination (similar to last year) between our team and the Company’s LEAP coordinator.
Accounting and Audit Issues
- ASC 326 (CECL) Implementation: A reminder that ASC 326 (aka CECL) went into effect last year. The biggest impact of the standard is for clients who have significant amounts of loans held for investments on their books. In the past, these were measured on an amortized cost method, but they now have to be measured for expected credit losses for the life of the loan. If your loans held for investment are significant for the 2024 year-end audit, we will need our clients to have some sort of methodology documented that takes into account past experienced credit losses and any anticipation of future expected losses.
GNMA Reporting Requirements
The following will be effective on December 31, 2024:
- GNMA Capital: The existing 6% leverage ratio requirement is unchanged and aligned with FHFA. The most significant change to the financial requirements is the introduction of risk-weighted aspect to the institution-wide capital component. The new calculation will weight assets as follows:
0% – Cash and cash equivalents, prepaid expenses and leases, items deducted from Equity to computer Adjusted Net Worth
25% – Government and conforming loans held for sale
50% – all other loans held for sale
250% – Gross MSRs (not to exceed Adjusted Net Worth)
100% – All other assets not included above
The following went into effect on September 30, 2023:
- Net Worth Requirement: $2.5 million plus 35bps of the unpaid principal balance of the Company’s GNMA servicing portfolio plus 25bps of the unpaid principal balance of the Company’s remaining servicing portfolio (i.e.: GSE and non-agency servicing portfolio).
- Liquidity Requirement: The greater of $1 million or 10bps of the unpaid principal balance of the Company’s GNMA servicing portfolio plus 3.5bps to 7bps of the unpaid principal balance of the Company’s remaining servicing portfolio (i.e.: GSE and non-agency servicing portfolio). Additional requirements for lenders who have originated over $1 billion in the last four quarters.
As always, please reach out us at [email protected] should you have any questions or concerns regarding these updates or your upcoming tax or audit engagements. We wish you all a very happy holiday season and a prosperous 2025!