A dozen Republican senators led by U.S. Sen. Jerry Moran (R-KS) last week requested that the U.S. Treasury Department improve protections for America’s community banks via tax relief provided in federal laws.
The lawmakers have requested that the final rule for the Internal Revenue Service’s (IRS) Aug. 18 notice of proposed rulemaking concerning the deduction for qualified business income under section 199A of the Internal Revenue Code – specifically that which is related to community banks that have elected Subchapter S tax status – provide tax relief that’s critical to their continued independence.
“We are hearing from many such banks in our states that the proposed rule does not reflect the intent of Congress to provide them with tax relief in the Tax Cuts and Jobs Act and is working at odds with the positive community bank reforms incorporated in the Economic Growth, Regulatory Relief, and Consumer Protection Act,” the senators wrote in an Oct. 17 letter sent to U.S. Treasury Secretary Steven Mnuchin.
The letter was signed by Sen. Moran and 11 other senators, including U.S. Sens. Deb Fischer (R-NE), Roy Blunt (R-MO), Mike Rounds (R-SD), Joni Ernst (R-IA), Roger Wicker (R-MS), and Shelley Moore Capito (R-WV).
The lawmakers noted in their letter that Subchapter S community banks provide numerous services in their local areas to complement their core lending services.
“These typically include trust and fiduciary services, insurance and securities brokerage, and wealth management. These are all services in demand in their communities and all are aspects of an integrated business model,” they wrote.
“The rule under Section 199A should recognize a business model important to so many American communities,” according to the senators’ letter. “In particular, we believe that all of the income that community banks earn as federally insured depository institutions should be eligible for the deduction created by Section 199A.”
They think Treasury’s proposed rule “would unreasonably force Subchapter S banks to choose between providing the full range of banking services needed in their communities and taking full advantage of the 199A deduction.”
The senators asked Secretary Mnuchin to revisit the department’s proposed regulation under Section 199A, and to take “a careful look at the 199A rule to ensure that it serves the purpose of strengthening Subchapter S community banks so that they can remain competitive, independent, and help strengthen American prosperity.”
Roughly 1,900 community banks accounting for a third of all banks nationwide now are under Subchapter S tax status, according to the members’ letter, with more than 75 percent of them having assets below $300 million. Community banks specialize in small business and agricultural lending and largely serve rural markets.
“Community banks across the country have voiced their concerns that the de minimis thresholds of the proposed rule for revenues derived from specified service trades or businesses (SSTBs) are unreasonably low,” the senators wrote. “Further, the definition of SSTBs should be more narrowly drawn and should exclude critical community bank services such as trust or fiduciary services, securities brokerage and the origination and sale of mortgages and loans guaranteed by the Small Business Administration and U.S. Department of Agriculture.”
The lawmakers pointed out that loan sales permit community banks to raise local lending while preserving their capital, which is another vital part of these banks’ business model.
“In our view, community banks should be allowed to segregate income rather than lose the deduction entirely,” they wrote.