Accountant warns of possible prohibition on sub S deduction

Jerry Kissell, tax partner, RSM US, told bankers some provisions in the Tax Reform law are ambiguous. The file photo above shows Kissell addressing an industry group in May. 

Will community bankers in subchapter S corporations be allowed to take a deduction designed to reduce their income tax obligation to a rate closer to what C corporations pay? Jerry Kissell, tax partner with RSM US, LLP, told bankers gathered for an event in St. Louis Park, Minn., the answer is uncertain. Kissell works in the firm’s Minneapolis office. He was speaking at the annual United Bankers’ Bank customer golf outing on June 18.

The qualified business income deduction is a 20 percent pass-through deduction that subchapter S corporations can take under the Tax Cuts and Jobs Act of 2017 signed in December. The deduction reduces the effective tax rate of top payers to 29.6 percent from 37 percent. The law, however, includes provisions which prevent some sub S corporations from using the deduction; among the prohibited businesses: “Financial services.”

Kissell said the law does not specify the definition of “financial services.” It is unclear, he said, whether the provision applies to community banks.

“The ICBA issued a letter saying they have talked to people who worked on this and they say the deduction applies to community banks,” Kissell explained. Furthermore, he said Rep. Kevin Brady (R-Texas), who chairs the House Ways and Means Committee, told the Subchapter S Bank Association in February that community banks qualify to take the deduction.

Kissell noted, however, these opinions do not match what the law says. He said he was copied on a 10-page letter dated June 7, 2018 written by attorneys from a prominent law firm based in Washington, D.C., making the case to the Interim Director of the IRS that community banks qualify for the deduction. “That tells me there is still something on peoples’ minds that people are not 100 percent sure this includes community banks. We are hoping it does,” Kissell said. “We are waiting for guidance.”

Kissell said in the past the IRS has generally provided clues about uncertainties related to new tax laws. Most recently, however, Kissell said the IRS has indicated it won’t be saying anything prior to implementing any provisions of the new law.