PrecisionLender provides the option to indicate a loan as tax exempt when pricing an opportunity.
Indicating a Loan as Tax Exempt
To select a tax exemption option (if enabled by your administrators for the loan product):
- Select the chevron in the 'Interest Options' field
- Select the 'Tax Exemption Option' field and choose the available tax exempt option
Not Tax Exempt - This option is used for standard loans. With Not Tax Exempt loans, a bank can use the interest expenses (carrying costs) on the funds that they raise as a write off.
Non-Bank Qualified or Bank Qualified - Select one of these options if the loan is tax-exempt. Your bank needs to determine if a loan is Bank Qualified or Non-Bank Qualified.
Bank Qualified and Non-Bank Qualified loans have different 'Interest Disallowance Factors' assigned them at the Regional level in PrecisionLender (Administration) which reflects an IRS regulation regarding the percentage of the interest expenses (carrying costs) that are disallowed from being written off.
Fully Tax Exempt - This option is a holdover from before the Non- Bank-Qualified and Bank-Qualified options were available. PrecisionLender recommends disabling this option at the Product level.
Custom Non-Bank Qualified- This option will apply a custom Interest Disallowance Factor that is set at the Regional level.
On an opportunity that is marked Tax Exempt, the initial rate is the rate the customer will receive. If you click into the Initial Rate field you'll see the Effective Yield.
- Effective Yield = (Raw Interest Income + Tax Exempt Impact) / Average Assets.
- Raw Interest Income and Tax Exempt Impact are shown in the Interest Income breakdown on the Financial Statement.
- Average Assets is equivalent to the Average Balance on the Financial Statement.
- Tax Exempt Impact = Raw Expected Interest Income * (Tax Exempt Income Adjustment Factor - 1)
- Raw Expected Interest Income = Expected Customer Rate * Average Balance
- Tax Exempt Income Adjustment Factor is determined based on cost of funding, tax rates, and interest disallowance factors.
- For more information on the math behind the scenes, visit How the Math Works.
When pricing a Tax Exempt loan, additional inputs will be available in the Fees field. You can enter fees that are either Tax Exempt or Non Tax Exempt.
For more information on how to add/remove tax exempt options from a specific product, visit this article: Setting Up Commercial Loan Products.