By: Tiffany Galligan, CPA; Lacey Heath, CPA; and Ashton Pellicano, CPA
What does the One Big Beautiful Bill Act (OBBBA) mean for banks and credit unions? As befitting its name, there’s something in this massive tax and spending package to affect just about everyone, and financial institutions are no exception. Here are some of the key provisions you need to know about in OBBBA.
Tax Exemption for Agricultural Interest
Perhaps the biggest change for the banking sector is a provision focused on agricultural loans. Newly Enacted IRS Section 139L contains an important update that improves the tax picture for certain lenders: Exclusion of Interest on Loans Secured by Rural or Agricultural Real Property.
- Qualified lenders include FDIC-insured banks, savings associations, and insurance companies located in the U.S. or a U.S. territory, or their subsidiaries.
- Qualified rural or agricultural real estate covers real property that is substantially used in agricultural production, fishing or seafood processing, as well as aquaculture facilities.
- Qualified loans for the purposes of this tax exemption must be:
- Originated after July 4, 2025
- Made to a borrower that is not a specified foreign entity
- Secured by property that is at the time the interest income accrues either:
- Rural or agricultural real estate, or
- A leasehold mortgage on rural or agricultural real estate
The IRS is expected to issue additional guidance to clarify which types of loans and structures will qualify for the exemption, particularly in edge cases such as mixed-use properties or partial refinancings. We will continue to monitor IRS updates and keep clients informed as further guidance becomes available.
Refinanced Loans Do Not Qualify
Loans that are refinancings of pre-enactment loans (i.e., loans originally made on or before July 4, 2025) do not qualify for the 25% interest exclusion, even if refinanced after that date. This also applies to series of refinancings: if the original loan predates the enactment, none of its refinanced versions are eligible. This detail is critical for institutions with a portfolio of longstanding agricultural loans. Only new originations after the enactment date count, not rollovers or refinancings.
Banks that hold multiple agricultural loans can look forward to meaningful tax savings as a result of this unexpected win.
Interest Expense Disallowance
The legislation provides that the excluded interest income will be treated as tax-exempt income, and 25% of the qualified real estate loan’s adjusted basis will be included in the bank’s calculation of the amount of interest expense deduction disallowed. With the recent increase in the cost of funds, this disallowance will reduce the overall benefit to the bank for this interest income exclusion. Insurance companies are subject to a 25% proration rate on tax-exempt income, which reduces the deduction for losses incurred.
Enhanced Depreciation Rules
OBBBA also establishes more expansive depreciation rules that could benefit financial institutions. If you’ve been considering an upgrade in technology or other investment, take note of these new provisions in the bill:
- Section 179. Certain organizations can now enjoy a generous $2.5 million limit on Section 179 deductions for qualified assets the year you place the assets in service (subject to certain restrictions). That’s twice the previous limit, which should encourage new investment and improve cash flow for institutions that choose to take advantage of the new cap.
- Section 168(k). First-year bonus depreciation gets a big boost in OBBBA as well. This provision can extend the benefits of Section 179 for newly acquired assets that exceed Section 179 deduction limits. Qualifying business property that your bank acquires and places into service after January 19, 2025, is eligible for 100% bonus depreciation. Unlike the Tax Cuts and Jobs Act’s bonus depreciation, which declined each year, the OBBBA permanently adopted 100% “bonus” depreciation for all future tax years.
Trump Accounts
While less impactful than the ag interest exemption and depreciation rule changes, the so-called “Trump Accounts” are likely to create a significant volume of new deposits. These tax-advantaged, FDIC-insured savings vehicles for children born between 2025 and 2028 are intended to help kids get a solid financial start in life. The account starts with a $1,000 deposit from the federal government.
Thanks to the power of compound interest and augmented by additional deposits from parents or employers (and perhaps states or charitable organizations), the balance will grow along with the children. They can use the accumulated savings to help fund the costs of education, start a business or buy a home once they reach age 18.
Auto Loan Interest Deduction
Some buyers of new U.S.-assembled vehicles will be eligible to deduct up to $10,000 in interest expenses on auto loans. Lenders will need to track this data and report it on Form 1098 for tax years 2025 through 2028, when the deduction sunsets. The deadline to issue forms showing interest borrowers paid in 2025 will likely be January 31, 2026, so plan ahead.
Plan Now to Capture the Full Benefit of OBBBA Changes
These are only a few of the ways OBBBA alters the tax and financial equation for 2025 and future years. Contact your Mauldin & Jenkins advisor to analyze the implications of the new rules and shape your next steps accordingly.
