Treasury Issues Plan for Sub S Tax Deduction

The Treasury Department issued its highly anticipated proposed rule to implement the Tax Cuts and Jobs Act’s 20 percent tax deduction for pass-through businesses.
While the proposal heeds congressional intent and ICBA advocacy by allowing Subchapter S community banks to qualify for the deduction, restrictions on certain types of financial services raise questions about how it will be applied.
Citing Section 199A of the tax law, Treasury’s proposed rule cites various financial services that do not qualify for the 20 percent deduction, such as wealth management and retirement planning.
Businesses that have $25 million or less in gross receipts and earn less than 10 percent of those receipts from these services would not be excluded from the deduction, nor would businesses with more than $25 million in gross receipts that earn less than 5 percent from those services.
While income derived from insurance brokerage would be fully eligible for the deduction, ICBA is particularly concerned about whether income from loans sold to be securitized will be eligible.
In communications with administration officials, including a recent meeting with staff from the White House and Office of Management and Budget, ICBA has advocated a broad interpretation that would ensure all Sub S community bank activities are eligible. This would bolster lending while ensuring the tax code does not incentivize pass-through businesses to restructure to C corporations—both priorities of tax reformers.
Comments on the proposal are due 45 days after it is published in the Federal Register. ICBA is reviewing the plan and will submit comments.