United States

IRS releases final guidance surrounding pass-through entity deduction


On Friday, January 18, 2019, the IRS released final regulations under Section 199A, qualified business income (QBI). The Tax Cuts and Jobs Act enacted section 199A, which provides a deduction of up to 20 percent of QBI for a domestic business operated as either a sole proprietorship, or through a business entity structured as a partnership, S corporation, trust, or estate. The final regulations adopt, with modifications, the proposed regulations issued in August 2018.

The provisions under section 199A only apply to QBI with respect to trades or businesses. Final regulations define a trade or business by reference to section 162, other than a trade or business of performing services as an employee. In addition, QBI must be with respect to a qualified trade or business, which is a trade or business that is not a specified service trades or business (SSTB) as defined in the Internal Revenue Code and Treasury regulations. The definition of an SSTB, and the ambiguity surrounding the types of businesses defined within, are critical to financial institutions.

The statutory language under section 199A provides that businesses that perform financial services, as well as businesses that are dealers in securities, are SSTBs and thus are not eligible for the benefits under section 199A. Prior to issuance of final regulations, these two types of service offerings created the most uncertainty for financial institutions. The final regulations address that uncertainty.


The regulations provide that a dealer in securities, for Section 199A purposes only, the activity of regularly purchasing securities from and selling securities to customers in the ordinary course of a trade or business. The final regulations also reinforce certain language from proposed regulations, and provide clarification to the definition of SSTBs, providing that:

  • The definition of financial services does not include the taking of deposits or making loans, thus protecting traditional banking activities from SSTB status, and
  • A bank’s practice of originating and selling loans would seem to escape dealer status, and thus SSTB status, by falling outside the regulatory definition of “regularly purchasing securities from and selling securities to customers in the ordinary course of a trade or business”, with the following modifications provided in final regulations:
    • The performance of services to originate a loan is not treated as the purchase of a security from the borrower, and
    • The proposed regulation’s reference to the negligible sales exception under Regulation section 1.475(c)-1(c)(2) and (4) was removed from the definition of dealing in securities in final regulations.

Complementary services

In addition to the traditional banking activities described above, it is common for financial institutions to provide other complementary services, some of which may constitute SSTBs. In this regard, final regulations specifically provide that trust and brokerage services, both of which are commonly provided by financial institutions, are considered SSTBs. Therefore, if trust and brokerage services were combined with traditional banking services it would seem that the combination of the activities could cause the traditional banking activities to be ineligible for Section 199A benefits if:

  1. the activities are part of a single trade or business, and
  2. the SSTB activities exceed a de minimis test provided under final regulations

The final regulations include a de minimis rule that provides that a trade or business with gross receipts of $25 million or less for the taxable year is not an SSTB, if less than 10 percent of the gross receipts of the trade or business, are attributable to the performance of services in a field deemed to be an SSTB. (The threshold is 5 percent for trades or businesses with gross receipts exceeding $25 million.)

Absent the de mininis rule, it would seem that a financial institution would still be eligible for benefits under section 199A, despite its SSTB activities, if the SSTB activities would meet the definition of a separate trade or business under section 162. As an alternative, a financial institution may consider spinning off the SSTB activities into separate taxable entities.

RSM US LLP will be releasing more information with respect to final regulations, applicable to all eligible taxpayers including financial institutions. In addition, RSM US LLP will be broadcasting a webcast on Tuesday, Feb. 5, 2019, with key members from the Firm’s Washington National Tax Practice.

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