Alan Keller: Subchapter S slowdown

The Treasury Department has made needed, ICBA-advocated reforms to tax deduction.

By Alan Keller, ICBA

Subchapter S bank shareholders will have significantly expanded access to the 20 percent tax deduction for pass-through businesses under a Treasury Department final rule that includes ICBA-advocated reforms.

The recently issued final rule 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 mortgages and other loans. Advocated in community banker grassroots letters and ICBA meetings with Treasury officials, this is a significant change that will benefit hundreds of community banks.

Since Congress began to consider tax reform, ICBA has consistently advocated for greater tax parity between S and C corp community banks. The initial versions of tax reform introduced in the House would have provided little to no tax relief, while the Senate’s first proposed pass-through deduction was set at 15 percent and excluded Sub S shares held in estates or trusts.

ICBA engaged Congress directly and through successful grassroots campaigns with the support of thousands of community bankers. The final version of the Tax Cuts and Jobs Act’s section 199A raised the deduction to 20 percent, and provides that it is available to shares held by estates and trusts, as well as individuals.

Advocacy on all fronts

Since the law was enacted in December 2017, ICBA has lobbied the Treasury, the White House and the Office of Management and Budget to implement it in a way that reflects Congress’ intent to provide tax relief for the many ways Subchapter S banks serve their communities.

The proposed rule from August clarified that community bank-qualified business income included income from the traditional banking services of deposit-taking and lending. It also provided that income from insurance brokerage qualifies. However, it would have excluded critical community bank services such as origination and the sale of mortgages and other loans.

ICBA responded with an intensive advocacy campaign that included president and CEO Rebeca Romero Rainey’s meeting with deputy Treasury secretary Justin Muzinich, a Senate sign-on letter to Treasury secretary Steven Mnuchin, many meetings with the Treasury’s Office of Tax Policy and a grassroots campaign supported by thousands of community bankers.

As a result, the final rule issued in January provides that income from the origination and sale of loans, including mortgage loans, is qualified business income and, therefore, eligible for the deduction under section 199A. This is a significant, positive change that recognizes loan sales as a core feature of the community banking business model. ICBA thanks the thousands of community bankers who joined in these advocacy campaigns.

While the final rule does not appear to rectify other banking activities ineligible for the deduction, such as wealth management and retirement planning, ICBA will continue working with policymakers to maximize Sub S community bank eligibility for the tax deduction.

Alan Keller ( is ICBA first vice president of legislative policy