MBA Asks Treasury, IRS to Clarify Business Income Deduction Rules

Mike Sorohan msorohan@mba.org

October 04, 2018

The Mortgage Bankers this week urged the Treasury Department and the Internal Revenue Service to further clarify its rules governing qualified business income deductions under Section 199A of the Internal Revenue Code.

Specifically, MBA said Treasury and the IRS should clarify its definition of "financial services" under Section 199A so that financing businesses, including mortgage banking companies, do not fall within the definition of "dealing in securities," and that "brokerage activities" do not include activities performed by financing businesses, including mortgage banking companies.

"By doing so, Treasury and the IRS would ensure that financing businesses, including mortgage banking companies, that Congress intended to help with the section 199A pass-through deduction, will realize the tax relief they were intended to receive," wrote MBA President and CEO Robert Broeksmit, CMB. "This, in turn, would be consistent with the competitive environment intended by Congress."

The letter comes in response to a proposed Treasury/IRS rulemaking seeking to clarify Section 199A. At present, Section 199A allows a 20 percent deduction of qualified business income from entities organized as pass-through entities (e.g., a partnership, S corporation or sole proprietorship). The purpose of Section 199A is to maintain a competitive balance between C corporations (which benefit from a greatly reduced tax rate under the Tax Cuts and Jobs Act) and businesses organized as pass-through entities that compete with those C corporations.

In crafting section 199A, Congress provided statutory exclusions from the application of the deduction for certain types of trades or businesses. Specifically, the deduction is not available to a "specified service trade or business" (SSTB) with business income above a certain threshold amount.

In its letter, MBA said in a notable interpretation of the section 199A definition of SSTB, the definition of "financial services" clarifies that that term does not include "taking deposits or making loans," which exempts independent mortgage banks from the definition.

"MBA agrees with the interpretation here, which clearly reflects Congress' intent and, in effect, clarifies that trades or businesses that ‘take deposits' or ‘make loans' are not examples of ‘financial services' trades or businesses that would qualify as SSTBs," MBA said. "It explicitly clarifies that ‘making loans' is not the SSTB of ‘financial services.'"

The letter noted mortgage banking companies are in the business of financing real estate, with a focus on financing real estate for borrowers in markets across the country.

"Mortgage banking companies engage in the business of financing with regard to single-family homes, multifamily rental housing, retail centers, office buildings, industrial facilities or other real estate in our economy," MBA said. "As a type of mortgage banking company, independent mortgage banking companies generally have a regional business focus and are not affiliated with depository banking institutions. Notably, many independent mortgage banking companies are organized as pass-through entities and compete directly with mortgage banking companies with a national footprint, as well as banks and other lending institutions."

Consistent with the interpretation and reasoning in the proposed regulations, MBA specifically requests additional clarification that "dealing in securities" and "brokerage services" do not include the business of financing.

"Lack of clear guidance in these areas in the proposed regulations will result in inconsistency, and therefore confusion for taxpayers who ‘need certainty in determining whether their trade or business generates income that is eligible for the section 199A deduction," MBA said. "Moreover, given that mortgage banking companies organized as pass-through entities compete directly in the real estate finance market with C corporations, the lack of clarifying guidance will result in a competitive imbalance that is squarely inconsistent with the very reason that section 199A was enacted."

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