Authors: Tiffany Galligan, CPA; Lacey Heath, CPA; Ron Mitchell, CPA; Ashton Pellicano, CPA
The One Big Beautiful Bill Act (OBBBA) included an unexpected tax break for financial institutions: lenders can exclude 25% of the interest on certain rural and agricultural loans from their gross income. Lenders sought clarity on the practical application of this provision, leading the IRS to issue recent interim guidance to address their questions.
Section 139L in a nutshell
Appearing as part of the massive tax and spending package signed in 2025, Section 139L introduced a new tax incentive for qualified lenders — FDIC-insured banks and credit unions, insurance companies, insurance holding companies and the Federal Agricultural Mortgage Corporation.
The rule allows financial institutions that extend loans secured by qualified rural or agricultural real property to exclude a quarter of the interest these loans generate when calculating gross revenue for tax purposes. By reducing gross revenue, Section 139L effectively lowers tax liability for these lenders.
IRS released Notice 2025-71 in late November of 2025, announcing a proposed rulemaking process that will establish final regulations under Section 139L. The notice also offers interim guidance that lenders can use until final rules are in place, with details of how they can claim Section 139L tax benefits appropriately. This timely guidance will help lenders (and their CPAs) navigate the regulation without introducing additional compliance risks.
Key points from Notice 2025-71
Financial institutions leaders should work with a qualified advisor to ensure complete compliance with the rules. However, these are a few of the most important takeaways from Notice 2025-71:
- The guidance applies to loans made after July 4, 2025, and remains valid until 30 days after proposed rules appear in the Federal Register.
- Original lenders and those who acquire qualified loans on the secondary market can claim the exclusion.
- Loans made before July 4, 2025, that are subsequently refinanced do not qualify for the exclusion unless additional funds are included in the refinancing. In this case, only the portion of the refinanced loan that exceeds the loan balance before July 4, 2025, qualifies.
- Loans extended after July 4, 2025, qualify even if they are drawn on a line of credit established before that date, unless the funds finance pre-existing debt.
- Qualified rural or agricultural property can contain personal residences and usage patterns that include crop rotation, seasonal fallow periods, and intermittent use if harvest cycles are the cause of the intermittent use.
- Low-intensity activities do not qualify a property for tax benefits under Section 139L. Examples of non-qualifying activities include backyard beekeeping, owning chickens to produce eggs for household use, or maintaining a small personal garden.
- Property used for agricultural production, fishing, aquaculture or seafood processing must meet a “substantial use” standard to qualify for the benefit.
- Lenders do not need to conduct formal appraisals to establish the value of qualified property that secures a loan, but may use any commercially reasonable valuation.
- Once a loan qualifies under Section 139L, lenders do not have to redetermine the property’s value relative to the loan as long as they have a “reasonable, good-faith belief” that the property still qualifies based on usage and the security interest is still valid.
- Section 139L interacts with Section 265, meaning lenders have to add back a proportionate amount of the lender's interest expense, based on the tax-exempt portion (25%) of the loan's adjusted basis, as a disallowed deduction under the rules of Section 265, similar to what financial institutions already do for investments in tax-exempt state and municipal securities.
Safe harbor provisions for valuation
Qualifying loans cannot exceed the value of the property that secures the loan. If the amount of the loan is greater than fair market value, the portion of the loan that represents fair market value can still qualify for tax benefits under Section 139L.
The interim guidance provides a safe harbor provision to help lenders feel confident that they’re complying with the rules: A loan qualifies in its entirety as long as the property is valued at 80% or more of the total loan amount.
Property value may include operating assets as well as real estate, assuming these assets are part of the lender’s security interest in the property. For example, livestock, machinery and farm equipment that secure the loan can all contribute to the property’s total value.
Help your institution make the most of this tax savings opportunity
The interim guidance includes a request for comments to inform regulatory authorities as they draft final rules. Lenders who want to contribute to this process can submit comments at www.regulations.gov (type IRS-2025-0400 in the search field). And while you’re helping shape the final regulation, your Mauldin & Jenkins advisor is here to help you capture the most tax savings from Section 139L.
Reach out today for expert support in understanding and applying the interim guidance to benefit your financial institution.
