It used to be an automatic that being a Subchapter S corporation could trim the tax bills of a lot of small-bank owners — no longer.

Leaders of S Corp banks, along with their accountants, analysts and lawyers, are trying to determine whether the new tax law provides them the same upper hand they once enjoyed over traditional corporations. If not, it might encourage more banks to shed their S Corp status before the March 15 federal deadline.

“Everybody’s scrambling right now,” said Guy Williams, president and CEO of Gulf Coast Bank & Trust in New Orleans, which is mulling a switch. “There’s a key deadline … and you have to decide by then whether you want to be a C Corp or an S Corp. Everyone is doing that analysis right now.”

The new law is clearly more beneficial to C corporations, the head of the $1.5 billion-asset bank said.

Bar chart of largest S corp banks by asset size

About a third of U.S. banks were S Corps on Sept. 30, based on data from FIG Partners and the Federal Deposit Insurance Corp. The vast majority of those banks have less than $1 billion in assets.

S Corps are so-called pass-through corporations, which are allowed to let profits flow directly to shareholders before federal income taxes are applied. Determining whether it is still worth it to be an S Corp for such investors is complicated.

One big consideration is the widening gap in tax rates between S Corps and C Corps.

C Corps had been taxed at a 35% rate, while S Corp shareholders were typically taxed at 39.6%, said Matthew Foley, a tax senior manager with Wolf & Co. The corporate tax rate will fall to 21% under the new law; most S Corp shareholders will be taxed at 29.6%.

Also, S Corp investors will be subject to the $10,000 individual limit on deductions of state and local taxes, Foley said; that limit does not apply to C Corps.

Those changes, on top of the inherent complexity of organizing an S Corp, could encourage more banks to make a change, Foley said.

“It does take some studying,” Foley said. “Is this flow-through still worthwhile? Or does moving to a C Corp make sense?”

Yet a number of banks might be content to keep their Subchapter S status.

North State Bank in Raleigh, N.C., which transitioned to an S Corp a year ago, is unlikely to switch back to a C Corp, said Larry Barbour, the $839 million-asset bank’s president and CEO.

“The new tax bill is not going to hurt us,” Barbour said, though he had wanted the new law to include greater deductions for S Corps. “It is going to help.”

Barbour said the prospect of lower taxes did not solely drive the transition to become an S Corp. The bank aims to stay independent and pay greater distributions to shareholders. The first year has gone well, and Barbour said it is easier to communicate and innovate with fewer investors.

North State has 180 shareholders, according to its website.

“I think you can compete more effectively as an S Corp than you can as a C Corp,” Barbour said. “We’re full steam ahead.”

It will take some time for banks to fully assess their corporate status, industry observers said.

“There will probably be a renewed effort or process at a number of bank holding companies … to analyze the various structures in place,” said Patrick Kennedy Jr., a lawyer at Kennedy Sutherland and president of the Subchapter S Bank Association.

There are “some fairly complicated provisions in the new law that will take some analysis,” Kennedy said, noting that the law includes a special deduction against qualified business income that could apply to S Corp investors.

Robert Klingler, a lawyer at Bryan Cave, said he is advising banks to be proactive and engage their boards, lawyers and accountants to analyze the expected effects of tax reform.

“The math behind it has changed,” Klingler said. “A fair number of Subchapter S banks may not have looked at that math since that initial decision” about their corporate structure, he said. “It’s time to look at it again.”

The March 15 deadline “emphasizes the need for management to promptly complete analysis, including what is necessary to make a change,” Klingler said.

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