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New Treasury Rule Impacts Subchapter S Bank Shareholders

Under a new Treasury Department final rule, Subchapter S bank shareholders will have significantly expanded access to the 20 percent tax deduction for pass-through businesses. The rule, which includes ICBA and IBANYS advocated reforms,  expands the availability of the Tax Cuts and Jobs Act’s deduction on qualified business income to include income from the origination and sale of mortgage loans – a significant change that will benefit hundreds of community banks.

ICBA continues reviewing the final rule, which does not appear to rectify other banking activities ineligible for the deduction, such as wealth management and retirement planning. It remains unclear how the disqualification of “investing and investment management services” would apply to trust or fiduciary services offered by a bank. Further, de minimis thresholds to qualify for the full deduction were not changed, despite ICBA calls to raise the thresholds to a flat 25 percent.  ICBA is preparing an analysis of the final rule and will continue working with policymakers to maximize Sub S community bank eligibility for the tax deduction.

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