The task of interpreting the significant tax provisions of the P.L. 115-97, otherwise known as the Tax Cuts and Jobs Act (TCJA), has given the Internal Revenue Service (IRS) plenty of work. It has taken time, but the IRS recently proposed regulations under Internal Revenue Code (IRC) §199A. You may recall than IRC §199A allows for a twenty percent (20%) deduction for certain types of qualified business income (QBI) with certain limitations for income thresholds on flow-through income.
We’ve commented in the past on potential risks for Independent Mortgage Bankers (IMB) based on interpretation of IRC §199A. The proposed regulations, which covers approx. 180 pages, are broken into five sections. The sections define detail calculations, affiliations, multiple trade or businesses in one entity, carryovers and more. One of the five proposed sections, Treas. Reg. §1.199A-5, addresses specified services of trade or businesses
The significant questions involved for IMBs relates to the definition of a “specified service trade or business” (SSTB), which could disallow the 20% deduction for IMBs. The following questions were addressed by the newly issued guidance:
- Is an IMB a trade or business of providing “financial services”, which falls under SSTB?
The guidance provides a narrow definition of financial services. Included services are “managing wealth, advising clients with respect to finances, developing retirement plans, and other services similar to valuations, mergers, acquisitions, dispositions, restructurings, and raising financial capital.”
- Is an IMB considered a dealer in securities as defined by the IRC §475(c)(2)?
The guidance defines a dealer in securities as, “regularly purchasing securities from and selling securities to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in securities with customers in the ordinary course of a trade or business.” The regulations further state that, “a taxpayer that regularly originates loans in the ordinary course of a trade or business of making loans but engages in no more than negligible sales of loans is not dealing in securities”. An IMB would need to review on a case by case basis if they meet the definition of negligible sales.
- Is an IMB a SSTB where the principle asset of such trade or business is the reputation or skill of one ore more employees or owners?
The guidance outlines that a SSTB would receive fees, compensation or other income on event appearances, use of images, as well as trademarks. The receipt of a partnership or S corporation interest is considered a fee or compensation for services.
Based on this guidance, IMBs are not providing financial services, nor a trade or business based on one or more of the employees or owners. IMB’s will need to analyze their facts and circumstances with respect to the definition of a dealer in securities. There are also many anti-abuse provisions and de minimis rules which require further scrutiny. Please let us know if you have any questions in the interim as we continue to analyze the full regulations.