New IRS rules a victory for Minnesota’s sub S banks

Minnesota’s 201 subchapter S banks can breathe a sigh of relief over a new IRS rule. The U.S. Treasury Department has proposed clarification of Section 199A Qualified Business Income deductions, specifically which business activities would fall under it.

The IRS issued a ruling in late January to provide community bank advocates changes they sought. Income from loan origination and sales – including mortgages – are now explicitly eligible for the 20 percent deduction on qualified business income. The 20 percent deduction was created by the Tax Cuts and Jobs Act of 2017. 

Section 199A is a part of the Tax Cuts and Jobs Act. Congress included it in the tax reform law in order to minimize the difference in tax obligation between C corporations and pass-through entities, or subchapter S corporations. While sub S banks qualify for the Section 199A deduction, they might not qualify for the full deduction if they are involved in certain business activities, which the IRS calls “specified service trade or business” (SSTB).

If revenue generated by SSTB activities exceed certain thresholds, the bank could be prohibited from using the deduction at all. It is unclear how many of the state’s sub S banks have SSTBs that produce revenue in excess of the IRS thresholds. Subchapter S banks tend to be smaller community institutions serving predominantly rural areas.

Excluding these activities from the deduction for sub S banks would have had a “chilling effect on a bank’s ability to raise capital as investors want to know whether the deduction will be available at the time of investment and in the future,” wrote ICBM President Jim Amundson.

While some SSTB activities are now explicitly included under the Section 199A deduction, the eligibility of other common services remains murky.

“With questions remaining over the final rule’s treatment of other community banking services, such as wealth management and fiduciary services, ICBA looks forward to continuing our work with policymakers to maximize Sub S eligibility for the tax deduction,” ICBA President Rebeca Romero Rainey said in a statement.

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