Tax Reform Section 199A Guidance Delayed

• July 13, 2018
• Amanda Garnett

The Department of the Treasury has a lot of work ahead of it drafting all of the tax guidance required by the Tax Cuts and Jobs Act before year end.  One of the most critical pieces is the detailed regulations associated with the 20 percent tax deduction for S corporation, partnership, and certain other business owners under Section 199A.  We have recently learned that those regulations are delayed and will not be released until at least the end of July. 

One key issue we are hoping to get clarification on through the new regulations is whether all bank income will be eligible for the 20 percent deduction.  Under the new law, specified service trade or business (SSB) income is not eligible for the 20 percent deduction unless shareholders fall below certain income thresholds established in the law

While we believe Congress clearly intended banks to qualify for the Section 199A deduction, there has been some debate whether certain sources of income that banks generate may be excluded as SSB income. 

Possible areas of contention include:

·         Trust revenue

·         Investment management revenue

·         Wealth management revenue

·         Loan servicing

It will be important to know if these types of revenue qualify because if they don’t banks will need to identify, calculate, and report the non-qualified income to their shareholders. 

The American Bankers Association, Independent Community Bankers of America, and Subchapter S Bank Association are all working hard on this issue and have written a letter to the Treasury outlining the need for additional guidance.

We are also awaiting many of the tools needed to better understand how the Section 199A deduction will function in practice including:

·         Draft 2018 corporate tax returns

·         Draft shareholder K-1s

·         A draft of the new form used by shareholders to calculate their 199A deduction

·         Form instructions

The additional delay in guidance from the IRS is not entirely unexpected, but does create more of a crunch for practitioners and institutions to analyze and react to the regulations.

The changes associated with tax reform are complex and each institution is unique.  CLA is here to help guide you through the nuances.  Please contact us.

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