Articles & E-Books


Banking Operations as Defined by §199A

Feb 26, 2019

Almost 400 days after the Tax Cuts and Jobs Act was signed, the Internal Revenue Code Section 199A regulations have been finalized. The §199A provision is one of the largest tax changes we have seen over the last 30 years. The Internal Revenue Service (IRS) issued the proposed regulations in August 2018. It is standard procedure for the IRS to request comments on the proposed regulations to identify what provisions need clarification before the regulations are finalized. The IRS received comments from many different stakeholders, including Wipfli. 


Before we get into the details of what is in the final regulations, let’s review what is the new §199A. §199A provides individuals, certain trusts, and estates a 20% deduction on qualified business income from pass-through entities. Tax simplification would have been a 20% deduction on all income passed through from a partnership, S corporation, or Schedule C, E, or F. However, Congress has limitations on how much of the deduction a person can receive and what type of income can be reduced, hence the new term to define, qualified business income. The rules further state that if a business is a specified service trade or business (SSTB), then the taxpayer cannot take the 20% deduction. Wait for it, Congress has another exception to that rule. If the SSTB is de minimis to the overall business, then all the activity is eligible.


The three logical questions are, (1) what is qualified business income, (2) what is a specified service business, and (3) how is de minimis defined? Qualified business income is income derived from a trade or business unless it is a specified service business. The Internal Revenue Code lists financial services as one of the specified service businesses, but §199A did not define financial services. The proposed regulations, however, provided some additional guidance. The definition of financial services is services provided by financial advisors, investment bankers, wealth planners, and retirement advisors and other similar professionals, but does not include taking deposits or making loans.” 


It was great news that S corporation banks were allowed to take the 20% deduction. However, what about banks’ trust departments, wealth management divisions, or retirement advisors they have employed to assist their customers? We issued our comments to the IRS that the banking definition should be expanded to include all activities that banks do to support the financial health of their customers. The activities of banks are already regulated so that §199A abuse could not be done since it would be outside of their bank charter. 


The IRS did not accept that belief or many of the arguments that were submitted. The final regulations did extend “making loans and taking deposits” to include originating loans to be sold on the secondary market. This was a good thing because it could have been that selling loans on the secondary market was outside of the “making loans” definition and would fall under the dealing in securities definition. We all know that many loans are sold on the secondary market and with a gross receipts test for the de minimis activity, that could cause many banks to not qualify for the 20% deduction. The final regulations did further state that if a bank is operating in more than one trade or business, then the S corporation bank will need to segregate its activities between qualified business income and specified service income. 


This is where de minimis comes into play. If the bank’s total gross receipts are under $25 million and its total gross receipts from SSTB activity are less than 10%, than all of its activities are eligible for the 20% deduction. If gross receipts are over $25 million, then the gross receipts from the SSTB activity need to be less than 5%. 

The end result of the final regulations is S corporation banks qualify for the 20% deduction as long as they do not operate outside of the traditional sense of the banking operations of making loans and taking deposits. If your bank has a trust department or investment management services, then you first need to determine if it is de minimis or not. If it is not de minimis, then you will need to segregate out the SSTB activity to allow your shareholders to take a deduction on a portion of your bank’s activity. Wipfli would be happy to help walk through this analysis for you to maximize the benefit for your shareholders. 


Jessica H. Mac Naughton, CPA
View Profile