IRS Issues Final Rules on Pass-Through Deduction for S-Corp Banks

The IRS on Friday issued its final rules providing guidance on how Subchapter S corporations may calculate the 20 percent deduction for pass-through entities included in the 2017 tax reform law. American Bankers Association staff continue to review the 247-page package. While generally positive, preliminary analysis suggests mixed results for a few issues of concern to S-corp banks.

In line with the rules as proposed, core banking activities like taking deposits and making loans qualify for the deduction. The rules also clarified that most income from originated loan sales qualifies. However, the IRS declined to issue a blanket qualification for all activities of a regulated bank — as ABA, the Independent Community Bankers of America and the Subchapter S Bank Association repeatedly advocated in letters and meetings with key staff.

The IRS also declined to increase the de minimis levels for non-qualifying activities, but it clarified that non-qualifying activities exceeding a de minimis level only disqualify net income from that activity, not all income of the bank. This will require S-corp banks with non-qualified activities, including some wealth management functions, to maintain records and determine the gross and net income from those activities.