How S corporation banks can qualify for the pass-through deduction
The Tax Cuts and Jobs Act created a new “pass-through” deduction (found in Internal Revenue Code Section 199A), which allows owners of S corporations and other pass-through entities to deduct up to 20% of their “qualified business income.” But Sec. 199A is subject to several restrictions and limitations. These include disallowance of the deduction with respect to specified service trades or businesses (SSTBs) for owners whose income exceeds certain thresholds.
SSTBs include financial services, brokerage services, investing and investment management, securities dealing, and several other services. So some S corporation banks have been uncertain about whether they’re eligible for the deduction. But recently finalized regulations provide welcome guidance, clarifying that “financial services” don’t include taking deposits or making loans. Further, originating loans for sale on the secondary market doesn’t fall under the “dealing in securities” umbrella.
Banks whose trust departments or wealth management advisors provide investment-related services or are involved in other SSTB activities may still qualify for the deduction, if either:
- These activities produce less than 5% of gross receipts (10% for banks with gross receipts under $25 million), or
- The bank is able to segregate its SSTB from its non-SSTB activities.
Homeowners Protection Act is on CFPB radar
In the Winter 2019 issue of its Supervisory Highlights report, the Consumer Financial Protection Bureau (CFPB) signaled a renewed focus on compliance with the Homeowners Protection Act (HPA). The HPA requires residential mortgage servicers to cancel private mortgage insurance (PMI) if certain conditions are met. The CFPB identified several deceptive practices among servicers, such as failing to properly disclose the reasons for denying PMI cancellations, providing inaccurate or incomplete reasons for such denials, and misleading consumers about the conditions for PMI removal.
You can find the full report at https://www.consumerfinance.gov/policy-compliance/guidance.
Guidance out on mortgage servicing rule
The CFPB has released several important implementation tools to help servicers comply with amendments to the mortgage servicing rules in Regulations X and Z. They include 1) a set of frequently asked questions regarding periodic billing statement requirements for borrowers in bankruptcy, 2) an updated small entity compliance guide that reflects the final amendments, and 3) an updated mortgage servicing coverage chart that incorporates the final amendments. You can find these tools at https://www.consumerfinance.gov/policy-compliance/guidance/mortserv.