On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law, introducing sweeping tax and spending provisions aimed at strengthening the U.S. economy. Among the most significant updates for financial institutions and rural communities is a new federal income tax exclusion designed to stimulate lending in the agricultural and rural real estate sectors.
New Exclusion for Agricultural Interest Income
Included in the OBBBA is new Internal Revenue Code §139L, which allows qualified lenders to exclude from taxable income 25% of the interest income received on certain loans secured by rural or agricultural real estate.
This partial exclusion applies beginning with taxable years ending after July 4, 2025, and is intended to reduce borrowing costs for rural communities, encourage private investment in agricultural development, and expand access to affordable credit in underserved markets.
Who Qualifies?
Qualified Lenders include:
- FDIC-insured banks and savings associations, including domestic entities wholly owned by a bank holding company
- State or federally regulated insurance companies, including entities owned by insurance holding companies
- The Federal Agricultural Mortgage Corporation (Farmer Mac), but only with respect to loans substantially used for agricultural production
Qualified Loans must meet the following criteria:
- Originated after July 4, 2025 (refinanced loans do not qualify)
- Made to a U.S. borrower (not a specified foreign entity)
- Secured by qualifying real estate or a leasehold mortgage with lien status
Qualified Rural or Agricultural Real Estate includes:
- Real property substantially used for producing agricultural products
- Real property substantially used for fishing or seafood processing
- Aquaculture facilities
Limits & Offsets
While the exclusion is a meaningful benefit, there are important caveats:
- Interest Expense Disallowance: The excluded interest income will be treated as tax-exempt income, and lenders must include the 25% portion of the adjusted basis of the qualified loan in their calculation of disallowed interest expense deductions. With today’s higher cost of funds, this reduces the overall benefit.
- Refinancings: Loans made before enactment, even if refinanced after July 4, 2025, do not qualify. This rule applies even to a series of refinancings tied to pre-enactment originations.
Expected Impact
If implemented effectively, this exclusion could:
- Stimulate investment in rural America by making credit more available
- Lower borrowing costs for farmers, fishers, and aquaculture businesses
- Support food security by helping preserve family farms
- Encourage broader financial industry participation in underserved rural markets
Additional Tax Benefits for Farmers
The OBBBA contains a host of provisions aimed directly at the agricultural sector beyond loan interest relief, including:
- Permanent 20% Qualified Business Income (QBI) deduction
- Permanent estate tax exemption of $15 million (indexed for inflation)
- Restoration of 100% bonus depreciation for qualifying property
- Increased §179 expensing limits, encouraging equipment investment
- Enhancements to farm programs and crop insurance, including expanded payment limits and premium support for beginning farmers
Related Financial Institution Benefits
In addition to the agricultural loan interest exclusion, financial institutions will also see broader tax changes:
- Enhanced Depreciation Rules: §179 expensing limits have doubled to $2.5 million, and OBBBA permanently reinstates 100% bonus depreciation for property placed in service after January 19, 2025.
- “Trump Accounts”: New tax-advantaged savings accounts for children born between 2025 and 2028 will begin with a $1,000 federal contribution and grow with deposits from families, employers, and others.
- Auto Loan Interest Deduction: For 2025–2028, some borrowers can deduct up to $10,000 of interest on loans for U.S.-assembled vehicles. Lenders must report interest paid via Form 1098, with the first reporting deadline expected in January 2026.
Expanded Affordable Housing Incentives
The Act also reforms the Low-Income Housing Tax Credit program to increase affordable rental housing availability by:
- Expanding the State housing credit ceiling, thereby increasing the amount of available credits
- Allowing more projects financed with tax-exempt bonds to qualify for housing credits without requiring a credit allocation from the State
What Comes Next
The IRS is expected to release further guidance on §139L. Financial institutions, particularly those with agricultural lending portfolios, should begin evaluating the potential impact of the exclusion and prepare systems to track qualifying loans separately from ineligible refinancings.
The bottom line is that the OBBBA provides significant new opportunities for lenders, farmers, and rural communities. For banks and insurance companies, the partial interest exclusion offers meaningful, though not unlimited, tax savings. For farmers, expanded deductions and program support strengthen long-term viability. And for rural America, the Act represents a major federal effort to channel capital where it is needed most.
As always, lenders and taxpayers should consult with a qualified tax professional to fully understand the implications of these changes and capture the maximum benefit.
Stay Informed on the OBBBA
We’re continuing to share timely insights to help you navigate the One Big Beautiful Bill Act. Find all our updates on the OBBBA Resource Hub, and follow us on LinkedIn and via email to stay connected.
If you need further guidance or have any questions, 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.
