The More Things Change…
There’s an old saying that if you don’t like the weather around these parts, just wait 30 minutes and it will change. You could say the same about the tax world in 2025, as the One Big Beautiful Bill Act (“OBBBA”) enacted significant changes to tax laws impacting Banks, with subsequent IRS and Treasury regulatory guidance adding complexity and nuance to certain OBBBA provisions. Additional IRS proposed regulations (regarding non-OBBBA provisions) and guidance from FASB resulted in even more considerations for financial institutions, as discussed below.
25% Exclusion of Interest Income on Loans Secured by Rural or Agricultural Real Property
The OBBBA created a 25% exclusion for interest income on loans secured by “Rural or Agricultural Real Property.” The exclusion applies to new loans originated after the date of OBBBA enactment (July 4, 2025). Correspondingly, both 25% of the interest income and 25% of the basis of the loan are included in the formula for the Non-Bank Qualified interest expense disallowance calculation (since such loans are not Bank Qualified).
In practice, many questions have arisen over this new provision. First, the use of “Rural or Agricultural” in the title is misleading, since the definition of qualifying loans refers only to agricultural real property. Thus, interest on “rural” loans not secured by agricultural real property would not appear to qualify despite the wording of the title to the statute.
Second, under a strict interpretation of the statute, if Producer A goes to Bank B and gets a new loan but uses the proceeds to pay off an existing loan from Bank C, the interest on the new loan may not qualify for the exclusion. It is also not clear if an increase in a credit line or refinanced loan amount qualifies.
Finally, the treatment of loans partially secured by agricultural real property but also secured by other property is unclear, as is the question of what happens if the initial use of the agricultural real property changes over time.
As a result of the many questions regarding the new statute, IRS Notice 2025-71 was issued in November 2025 to provide interim guidance addressing many of these questions.
Bonus Depreciation
The OBBBA permanently restores 100% bonus depreciation for tangible MACRS property with a class life of 20 years or less, computer software, qualified improvement property (QIP), and certain other property listed in §168(k) that is acquired and placed in service after January 19, 2025. Taxpayers may elect out of bonus depreciation for any class of property. The OBBBA also provides that taxpayers may elect 40% bonus depreciation, instead of 100%, for the first tax year ending after January 19, 2025.
The ability to elect 100% bonus (for assets placed in service after 1/19/2025), 40% bonus, or elect out of bonus depreciation entirely, provides flexibility for Banks in managing their 2025 taxable income and their capacity for utilizing federal income tax credits.
Deduction for Research Expenses
The TCJA required capitalization and five-year amortization of domestic R&E expenses beginning in 2022.
Under the OBBBA, domestic R&E expenses are deductible when incurred for tax years beginning after December 31, 2024. Accordingly, Banks that have incurred significant expenses to customize software programs, particularly those accessed by third parties, may want to take another look at the potential for claiming the research tax credit.
Energy Tax Credits
The OBBBA phases out many energy credits, as set forth below:
- §48E Wind & Solar investment tax credits and production tax credits must be placed in service by 12/31/2027 if construction starts after 7/4/2026. If construction starts before 7/4/2026, such projects must be placed in service within 4 years or demonstrate continuous construction efforts;
- §30C – Alternative Fuel Vehicle Refueling Property – EV infrastructure credit is repealed for property placed in service after 6/30/2026;
- §45V clean hydrogen credit construction must begin prior to 1/1/2028;
- §45X manufacturing credit added metallurgical coal but terminates credit for wind components as of 12/31/2027; and
- §45Z manufacturing credit is extended to 12/31/2029, with some restrictions on biofuel sold after 12/31/2025.
Notice 2025-42 provides guidance on what constitutes the beginning of construction (“BOC”) for wind and solar credits. The physical work test is now the sole method for establishing BOC. The 5% Safe Harbor is available only for low-output solar projects (≤1.5 MW AC). The Notice outlines qualifying and nonqualifying activities, including the use of third parties. It requires taxpayers to maintain a continuous program of construction, and covers retrofits, property transfers, and project aggregation.
Additionally, for tax years beginning after 7/4/2025, the OBBBA creates new rules which may result in the elimination of an entire credit if foreign entities of concern (“FEOC’s”) are involved at either the project or ownership levels.
The good news is that the OBBBA did not repeal the direct transferability of credits for those investors that prefer a direct purchase rather than the traditional tax credit partnership investment structure. Certain energy credits can still be carried back three years. As a reminder, due to the investment tax credit ordering rules, if a taxpayer wishes to purchase credits and carryback three years, any other federal tax credits in the current tax year become a carryforward, which results in a deferred tax asset that is disallowed for bank regulatory capital purposes.
As sponsors rush to begin construction in order to meet the OBBBA phase out timeline, investors should remember that there are tax risks associated both with the purchase of credits and the traditional investment in a partnership tax credit structure.
162(m) Compensation Deduction Disallowance
Beginning in 2027, Banks must identify an additional five individuals for purposes of the §162(m) disallowance of compensation greater than $1 million. This provision was enacted as part of the American Rescue Plan Act, and accordingly, these additional covered individuals are commonly referred to as the “ARPA-5.” Notably, these individuals are not subject to the “once covered always covered rules” that apply to other covered individuals. Compensation includes amounts paid to an individual by certain related entities.
Of particular note, Treasury issued Proposed Regulations in 2025 that would include in the “ARPA-5 covered individuals” designation an employee of a completely unaffiliated entity who is not an employee or an officer of the publicly held corporation but who performs “substantially all” of the individual’s services “during the relevant taxable year” for the publicly held corporation. Since these service provider employees are not employees of the company, it is not clear how this Proposed Regulation is consistent with either the literal language of the statute or the Congressional intent of §162(m).
Additionally, the proposed regulations count as “compensation” not just the compensation paid to the identified ARPA-5 individuals during the year, but also “the aggregate amount allowed as a deduction” to the public company that is paid to any entity (including entities outside the public company’s controlled group) that employs even a single individual whose services are “substantially all” performed for the public company “during the relevant taxable year.”
Hopefully, these controversial aspects of the proposed regulations will be modified in response to comments Treasury receives.
M&A Outlook
Bank mergers continued to occur in 2025 under a more favorable regulatory climate and may well accelerate further in 2026. Here are only a few of the many issues for both Acquiring and Target banks to consider as they contemplate potential merger and acquisition activity:
- Planning to avoid a Target short period tax net operating loss carryforward to avoid bad bucket deferred tax assets (DTA’s) subject to full disallowance under Basel 3. In 2025, the IRS withdrew prior proposed regulations dealing with the impact of built in gains and losses on the tax net operating loss limitation of §382, thus the more taxpayer favorable guidance under Notice 2003-65 remains available. Proper planning using this guidance can result in significantly reducing the §382 limitation.
- While a favorable Tax Court decision in 2025 held that a deal termination fee was an ordinary expense, the IRS is appealing that decision and may still view any deal termination fees or breakup fees as capital losses.
- IRS guidance may mitigate a former tax trap for acquired Bank Owned Life Insurance (where life insurance contracts are not more than 5% of Target Bank assets) – but careful attention to BOLI policies can avoid unintended consequences.
- Proper planning is key to minimize any non-deductible golden parachute payments. The ability to use non-compete covenants to mitigate parachute provisions is now back to applicable state law provisions given a District Court’s ruling that new FTC provisions rendering non-competes unenforceable is unconstitutional.
- Analysis of transaction costs is required even if claiming the deductible 70% safe harbor for success-based fees. Issues include whether the transaction is covered by the safe harbor and the treatment of milestone payments.
- In tax free mergers, the receipt of cash boot by Target shareholders is deemed to be a taxable repurchase by a public Target, and thus subject to the 1% excise tax on stock repurchases; and
- Tax insurance against acquired bank tax exposures is becoming more prevalent.
Information Reporting
Qualified Auto Loan Interest
The OBBBA provides for the deductibility of interest on passenger vehicle loans for vehicles manufactured after 2024 whose final assembly was in the US (“specified passenger vehicle loans”). Banks will need to look to the dealer or manufacturer as to whether a particular vehicle qualifies.
Notice 2025-57 provides transition relief, under which a Bank may satisfy information reporting requirements for 2025, and avoid penalties, by making a statement available to the individual on or before January 31, 2026, indicating the total amount of interest received in calendar year 2025 on a specified passenger vehicle loan. The statement can be an online account portal that the individual can easily access, a regular monthly statement, an annual statement that is provided to the individual, or by other similar means.
New Draft Forms W-9 and 1099-DA
Beginning in 2026, Banks may be required to obtain all new Form W-9’s. The purpose of the new forms will be to allow customers to claim exemption from information reporting as a US Digital Asset Broker (as required by the new form 1099-DA). Since it is possible that few customers of many banks will claim the exemption, industry efforts are underway to obtain relief from the requirement to obtain all new Form W-9’s.
Tax Relief on Tips and Overtime
The OBBBA provides for individuals a new above the line deduction for qualifying tips and overtime pay. The IRS has recognized that 2025 is a transition year for employers and has published drafts of Forms W-2 and 1099 for 2026, which will be updated for the OBBBA changes. Accordingly, Notice 2025-62 provides for employer relief for 2025 only with regard to information reporting penalties related to these new requirements, provided that certain conditions listed in the Notice are met.
Forms 1099-MISC and 1099-NEC
Under the OBBBA, the threshold amount for reporting payments on Forms 1099-MISC and 1099-NEC is increased from $600 to $2,000 for payments on or after January 1, 2026, and the threshold is indexed for inflation starting in 2027. The $600 threshold remains in effect for 2025 payments.
Bad Debt Proposed Regulations / ASU 2025-08
2023 Proposed Regulations on the tax treatment of bad debts remain proposed, while the FASB has recently issued an ASU significantly impacting the GAAP treatment of acquired loans. These new Tax and GAAP developments, which will require careful analysis, are discussed below.
Proposed Tax Allowance Charge Off Method
Under the existing tax bad debt conformity method, a Bank is entitled to the conclusive presumption of worthlessness for tax return purposes with regard to assets wholly or partially charged off for book purposes. Many Banks have not elected the conformity method but are deducting their book net charge offs on the tax return under a facts and circumstances approach. Under this approach, the IRS is free to challenge the taxpayer on audit that the bad debts are not worthless or partially worthless for income tax purposes.
In December 2023, the IRS issued Proposed Regulations which would create a new tax method of accounting for bad debts – the Allowance Charge Off Method (“ACM”). While we previously discussed the Proposed Regulations in a prior article, as a reminder there are some important differences between the existing conformity method and the ACM.
The ACM will apply to a Bank and any 80% or more affiliate (with the exception of a captive REIT). In contrast, the existing conformity method only applies to Banks. Taxpayers adopting the ACM may exclude some partial charge offs from the new method and defer the tax bad debt deduction for those partial charge offs until future years (which is beneficial in certain M&A scenarios), while the old conformity method did not allow for such deferrals.
The ACM extends protection to bad debts claimed on debt securities, which was unclear under the old conformity method. The new method also does not require a Regulatory Determination Letter, as was required under the prior conformity method. One issue to be clarified in final regulations is whether non-accrual loan interest will be deemed to be charged off under the ACM as it was under the former conformity method.
The proposed bad debt regulations may be early adopted for the 2025 tax year.
ASU 2025-08
The Financial Accounting Standards Board has released ASU 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans, a significant update for banks and financial institutions that acquire loan portfolios. Issued on November 12, 2025, the new standard aims to eliminate longstanding concerns around “double-counting” expected credit losses and brings greater consistency to how acquired loans are reported under CECL. For financial institutions, the changes will alter acquisition accounting, credit-loss modeling, and the presentation of post-acquisition earnings in a meaningful way.
The new rules take effect for fiscal years beginning after December 15, 2026, and apply prospectively. Institutions will not need to revisit prior acquisitions, which avoids a substantial operational burden. Early adoption is permitted.
These significant changes to both Tax and GAAP treatment of bad debts will require careful analysis and coordination.
Expansion of Proportional Amortization Method
ASU 2023-02 expanded the population of tax credit investments for which the investor may elect to apply the Proportional Amortization (‘PAM”) method from LIHTC’s to any tax equity investment meeting the PAM criteria. Under PAM, both the book and tax effects of the investment are recorded on the income tax expense line of the financial statements.
In practice, Banks are finding that many energy credit projects may not meet the PAM criteria. One hurdle to adopting PAM for energy credit investments is that substantially all of the projected benefits are from income tax credits and other income tax benefits. Substantially all is not defined but is generally considered to be 90%.
Additionally, the adoption of PAM requires use of the flow through (to the effective tax rate) method for accounting for income tax credits. Many Banks prefer to use the deferral method for investments in energy tax projects, under which the book investment in the energy credit project is reduced by the amount of the tax credit.
FASB Tax Disclosure Update
As discussed in our last year end update, on December 14, 2023, the FASB issued a final standard on improvements to income tax disclosures. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid.
ASU 2023-09 is effective for public business entities (PBE’s) whose annual periods begin after December 15, 2024. For entities other than PBE’s, the requirements are effective for annual periods beginning after December 15, 2025. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted.
The new guidance focuses on two specific disclosure areas: the rate reconciliation and income taxes paid.
- Rate Reconciliation – The ASU requires businesses, on an annual basis, to provide a tabular effective tax rate reconciliation using both percentages and dollar amounts. Separate rate reconciliation disclosure is required for any item equal to or greater than 1.05% [5% x the federal statutory rate of 21%] within the following categories: (a) state and local income taxes (net of federal benefit); (b) effect of changes in tax laws enacted during the period; (c) tax credits; (d) change in valuation allowance; (e) non-taxable income and non-deductible items (i.e.- impact of equity compensation awards); and (f) changes in unrecognized tax benefits.
- Income Taxes Paid – For each annual period presented, the ASU requires all reporting entities to disclose the year to-date amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign. It also requires additional disaggregated information on income taxes paid (net of refunds received) to an individual jurisdiction equal to or greater than 5% of total income taxes paid (net of refunds received). An entity may identify a country, state, or local territory as an individual jurisdiction.
New York Tax Reform Regulations Update
On April 28, 2025, the New York Supreme Court ruled that a NYS corporate income tax reform regulation, issued on December 27, 2023, but retroactive to 2015, was not valid retroactively (the Court did uphold the regulation, which dealt with income tax nexus and Public Law 86-272, prospectively). The taxpayer in question is appealing the prospective application of the regulation.
Since the NYS tax reform regulations take a number of controversial positions which adversely impact Banks, taxpayers will want to closely monitor the progress of this case [American Catalog Mailers Association (ACMA) vs. NYS Dept of Taxation and Finance], as well as consider its impact on those adverse provisions of the regulations impacting Banks, which were made similarly retroactive 9 years. Note that since ACMA was not a NYS taxpayer at the time, this case will proceed through the general NYS court system rather than Division of Tax Appeals.
Navigating All the Tax Changes
As you consider the impact to your Bank of these and other changes to bank tax laws, it’s important to develop an overall plan, taking into account both your effective tax rate and the regulatory capital impact of deferred tax assets. We would be glad to assist you in this process. Please do not hesitate to reach out to discuss your specific situation. After all, as Yogi Berra once said, “If you don’t know where you’re going, you might not get there.”
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
