IRS Issues Guidance on Section 199A for S Corporations
As we previously discussed, the Tax Cuts and Jobs Act (TCJA) signed into law last December left some ambiguity regarding whether or not S Corporation banks would be eligible for a deduction of up to 20% of qualified business income under Section 199A. Proposed regulations issued this week resolve the matter.
Specified Service Businesses
Under the TCJA, specified service trade or businesses (SSBs) are not eligible for the 199A deduction unless shareholders fall below certain income thresholds established in the law. There was initially concern that banks might fall into the “financial services” category of SSBs provided in the law.
The new proposed regulations clarify that Congress did not intend to include banking under the category of “financial services”. Therefore, banks are not generally considered to be SSBs and would be eligible for the Section 199A deduction.
Concerns over Non-Interest Income
Commentators have also been concerned that certain types of non-interest income generated by banks could be considered SSB income even though banking in general is excluded from SSB, which could potentially reduce or eliminate the overall 199A deduction.
To address this concern, the proposed regulations provide a de minimis rule. An entity will not be considered a SSB simply because it has a small amount of service-related revenue.
De Minimis Threshold
For entities with annual gross receipts of less $25 million, the de minimis threshold is 10% of total receipts. For larger entities, the de minimis threshold is 5% of total receipts. In most cases, we believe that any service-related revenue generated by community banks will fall below these thresholds.
Banks should review their non-interest income sources and identify any substantial revenue streams that may count towards the 5%/10% de minimis threshold to ensure that they are indeed below the limit.
SSB activities where the de minimis threshold may apply include:
- Helping customers manage their wealth
- Advising customers with respect to their finances
- Developing retirement plans or wealth transition plans
- Providing brokerage services
- Providing investment or asset management services
- Providing advice or assisting customers with buying or selling investments
- Providing other consulting services to customers
The IRS has clarified that the following are not considered to be SSB activities:
- Insurance agency or brokerage services
- Real estate agency or brokerage services
Conclusion
The information released by the IRS this week includes over 180 pages of detailed guidance and will take some time to fully digest. We will continue to provide you with additional information as we learn more.
Each organization and situation is unique and the 199A rules include a lot of complexity and nuance.
CLA is here to help you work through the intricacy. Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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