IRC §139L: A New Tax Exclusion for Agricultural Lenders With the passage of the One Big Beautiful Bill Act, a new federal tax benefit was created for qualifying agricultural loans under Internal Revenue Code Section 139L. The provision requires banks to exclude 25% of the interest income from qualifying loans from federal taxable income. This article outlines the key rules, explains their interaction with the related interest expense disallowance under §265(b), and highlights recently issued interim guidance and the uncertainties that remain. Background Section 139L has its origins in an earlier bill, the Access to Credit for our Rural Economy Act (ACRE), which sought to incentivize banks and reduce borrowing costs for farmers by making interest for rural and agricultural loans exempt from taxation. While §139L does not go as far as ACRE, it continues the same policy goal and establishes a permanent exclusion intended to support credit availability for agricultural markets. §139L Key Definitions • Qualified Lender: Banks, savings associations, state or federally regulated insurance companies, and subsidiaries wholly owned by a domestic bank holding company or domestic insurance holding company. • Qualified Real Estate Loan: A loan originated after July 4, 2025, that is secured by rural or agricultural real estate, with some exceptions. • Rural or Agricultural Real Estate: Real property substantially used for the production of agricultural products, in the business of fishing or seafood processing, or any aquacultural facility. • Refinancings are ineligible for the interest income exclusion. Refinancings are defined as using the proceeds from a new loan to refinance a loan that was made on or prior to enactment (July 4, 2025). How §265(b) Reduces the Benefit Similar to other tax-exempt loans and securities, lenders must consider the implications of §265(b), which reduces the overall benefit of the exclusion. Section 265(b) requires banks to disallow a portion of their interest expense based on their relative proportion of tax-exempt assets. This disallowance is computed as follows: Total Interest Expense x (25% of Average §139L Loan Balance) ÷ Average Bank Assets. The resulting disallowed interest expense increases taxable income and reduces the overall benefit of the §139L exclusion. Depending on the bank’s cost of funds, this interest expense disallowance may have a larger-than-expected impact and is important to incorporate into pricing decisions. Interim Guidance On Nov. 20, 2025, the IRS issued Notice 2025-71, providing interim guidance on §139L’s interest income exclusion for loans secured by qualified rural or agricultural property. While requesting comments on open issues, the notice clarifies: • No Origination Requirement: A qualified lender may receive §139L treatment even if it did not originate the loan. • Safe Harbor: If the FMV of qualified rural or agricultural property is at least 80% of the issue price, the entire loan qualifies. • Loan Eligibility: For loans that do not qualify for the safe harbor, the exclusion is limited to the lesser of principal or the property’s fair market value (FMV) at issuance; subsequent holders may rely on original FMV or recalculate at acquisition. • FMV Determination: Lenders may use ordinary valuation methods and include secured personal property, e.g., equipment or livestock. By Sam Brandt, Tax Director, Forvis Mazars 36
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