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New Guidance on the 20% Deduction for S-Corporation Banks

Aug 29, 2018

The Tax Cuts and Jobs Act created a brand-new tax deduction under Section 199A. In simple terms, Section 199A provides a 20% tax deduction for individuals, certain trusts, and estates on qualified business income (QBI), including pass-through income from an S corporation. One needs to wade through numerous definitions and limitations to calculate the amount of the tax deduction. Up to this point, there has been uncertainty regarding how these definitions and limitations apply in various scenarios, including whether S-corporation banks are fully eligible for the tax deduction.

To provide clarification, the Treasury issued proposed regulations for the Section 199A deduction earlier this month. These regulations provide guidance on the types of businesses that qualify for the deduction (qualified trades or businesses) and the types of business that don’t qualify (specified service trades or businesses, or SSTBs). The regulations also provide de minimis rules that allow a taxpayer to avoid separating out an SSTB if the gross receipts from the SSTB are less than 5% of total gross receipts (or less than 10% of total gross receipts if the taxpayer has total gross receipts under $25 million).

There are many categories of SSTBs, but the ones of most concern to banks are:

  • Financial services
  • Brokerage services
  • Investing and investment management
  • Trading or dealing in securities

Financial Services. Section 199A states that an SSTB includes any business involved with the performance of financial services. Although the term by itself might seem broad enough to include banking, the definition referenced in the statute was clear that banking was not included. In the preamble to the proposed regulations, the authors specifically acknowledge that banking is not included in the “financial services” term. They state that the term includes “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.” Thus, in general terms, banking is a qualified trade or business and does qualify for the 199A tax deduction. However, many banks provide wealth management or retirement planning services, which could be a problem if the gross revenue from these services exceeds the de minimis threshold.

Brokerage Services. Section 199A also states that an SSTB includes any business involved with the performance of brokerage services. Prior to the proposed regulations, there were questions about whether real estate agencies or insurance agencies were included in this term. The preamble to the proposed regulations also specifically excludes “services provided by real estate agents and brokers, or insurance agents and brokers” from the term “brokerage services.” Rather, “brokerage services” applies in the context of stockbrokers, who arrange transactions between a buyer and seller with respect to securities for a commission or fee. Thus, these types of trades or businesses (insurance and real estate agencies or brokerages) are qualified for the 199A tax deduction.

Investing and Investment Management. Section 199A states that an SSTB includes any business that involves the performance of services that consist of investing and investment management. The proposed regulations define this term to mean “a trade or business that earns fees for investment, asset management services, or investment management services including providing advice with respect to buying and selling investments.” It includes a trade or business that “receives either a commission, a flat fee, or an investment management fee calculated as a percentage of assets under management.” For banks that have significant trust operations, this definition could require the bank to break out the SSTB separately from the banking income if the de minimis threshold is exceeded.

Trading or Dealing in Securities. Finally, Section 199A states that an SSTB includes any business that involves the performance of services that consist of trading or dealing in securities. Under the proposed regulations (and other code sections, including IRC Section 475), this category excludes “a taxpayer that regularly originates loans in the ordinary course of a trade or business of making loans but engages in no more than negligible sales of the loans.” Negligible means less than 60 loans sold during the year or less than 5% of the total principal of loans originated. Many banks will fail this “negligible sales exception.” If you are over these amounts, you are considered a dealer in securities, and the profits from your loan sales may have to be tested as an SSTB to determine whether they are de minimis. We are hoping for additional guidance from the Treasury on how this will specifically apply to banks.

What does this mean for your S-corporation bank? There is a 45-day comment period for the proposed regulations, and we expect additional clarification when the final regulations are issued. For now, if you are an S-corporation bank, it is good to have a basic understanding of the proposed rules. We also advise that you review the activities that are considered SSTBs (see the list above) and determine whether you exceed the de minimis thresholds. See the chart below for examples of S-corporation banks with large investment advisory or trust operations.

If your bank does not have over 5% of your gross receipts from one of the types of SSTB income (or 10% if your total gross receipts are less than $25 million), then you don’t need to worry about breaking out any SSTB income. If you do have SSTB income over the de minimis threshold, then the current guidance will require you to break out that business and report it separately to your shareholders on their Schedule K-1s. Depending on your shareholders’ level of taxable income, they may not be allowed to take the 20% deduction with respect to that SSTB. If you have SSTB income over the de minimis threshold, you may also want to consult with your tax advisor to discuss the potential impact on estimated tax payments and quarterly tax distributions.

Regarding the 45-day comment period, Wipfli does plan to reach out to the authors of this guidance and submit formal comments. We hope that these comments will help to provide additional clarification on many of the unanswered questions. Wipfli will continue to provide additional updates to our banking clients as more information becomes available.


Bank Examples to Illustrate whether SSTBs

are not de minimis

Bank A

Bank B

Bank C

 Bank D  Bank E Bank F

Bank G

Asset size




 575,000,000  730,000,000  1,820,000,000


Gross Receipts




 27,000,000  33,000,000  80,000,000


de minimis threshold (10% if under 25M, else 5%)




 5.00%  5.00%  5.00%


Gross Receipts from Asset Management Fees




 355,000  900,000  4,615,000


percent of gross receipts




 1.31%  2.73%  5.77%


Ignore as de minimis or break out as SSTB

Break Out

Break Out

Break Out

 De Minimis  De Minimis  Break Out

De Minimis










Jason J. Wimmer, CPA, MBT
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