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.
• No Ongoing FMV Testing: Unless a significant modification occurs.
• Reasonable Belief: Lenders may rely on initial determinations based on good-faith belief that the loan is secured by qualified rural or agricultural property and borrower certifications.
• Loss Of Status: If property ceases qualifying use, §139L treatment ends unless remedied within 90 days.
• Loan Proceeds: Use of proceeds does not affect eligibility; determination is made on collateralized property.
• Refinancing: Only amounts exceeding the pre-enactment loan’s outstanding balance qualify; significant modifications under §1.1001-3, e.g., changes in yield, maturity, obligor, or collateral, are treated as refinancings and do not qualify.
• Residences: Allowed if the property as a whole meets the substantial use requirement; properties with minimal personal agricultural production do not qualify, e.g., personal garden.

Significant uncertainty remains around several practical aspects of §139L. Key questions include what activities qualify as producing agricultural products and how to interpret the requirement that property be “substantially used” for production — should this be measured by acreage, value, revenue, or time, and how should seasonal or mixed-use properties be treated? For example, farmland that hosts events or other non-agricultural activities raises questions about whether partial non-agricultural use disqualifies the loan.

Operational Considerations for Banks

Until proposed regulations are released, banks will need to adopt an approach that reflects their risk tolerance when determining §139L eligibility during loan pricing and tax compliance. Institutions can begin preparing internal systems to track eligible loans and document the criteria used. This may include refining loan-coding procedures, training loan officers and documenting borrowers’ intended use of the property. Because the law is permanent, taking these steps now will better position banks for consistent compliance and future regulations.

Conclusion and Future

Section 139L potentially offers a meaningful tool for banks serving agricultural communities. Although the 25% exclusion will provide some benefit, the corresponding interest expense disallowance must be factored into any analysis of the net benefit. In the meantime, many bank industry groups are pushing for an expansion of the provision’s benefits. As lenders navigate the new rules, it will be important to document decisions and develop a reasonable approach for addressing the statute’s grey areas until additional guidance is issued.