IRS, Treasury Propose Regulations on Pass-Through Deduction

The Internal Revenue Service and the Treasury Department today issued proposed regulations implementing the 20 percent deduction that pass-through entities, including Subchapter S corporations, can take under the 2017 tax reform law.

Under the tax law, “specified service trade businesses” such as law firms, accounting firms and medical practices are not eligible for the deduction. However, the law also included “financial services” as a category of SSTB. In letters and in-person meetings, the American Bankers Association — in partnership with the Independent Community Bankers of America and the Subchapter S Bank Association — emphasized that Congress had intended for banks to be eligible for the pass-through deduction and urged Treasury to clarify that financial services did not include banks in this instance.

“The Treasury Department and the IRS agree with such commenters that this suggests that financial services should be more narrowly interpreted here,” the agencies said in the proposed rule, which “limits the definition of financial services to services typically performed by financial advisers and investment bankers. . . . This includes services provided by financial advisers, investment bankers, wealth planners, and retirement advisers and other similar professionals, but does not include taking deposits or making loans.”

While the clarification is welcome, other aspects of the regulations raise questions about selected activities banks may engage in and qualify for the deduction. There are also de minimis exceptions that may be applicable. Comments on the proposal are due 45 days after it is published in the Federal Register. ABA is in the process of evaluating the package and will providing a staff analysis soon. For more information, contact John Kinsella or Curtis Dubay.