On July 4, 2025, President Trump signed H.R.1, commonly referred to as the “One Big Beautiful Bill Act,” a sweeping legislative package that includes wide-ranging reforms affecting infrastructure, tax policy and economic development.
Of particular interest to financial institutions and agricultural stakeholders is Section 70435 of the bill (new Internal Revenue Code Section 139L), which introduces a federal income tax exclusion for a portion of interest received on certain loans secured by rural or agricultural real property.
This provision aims to reduce borrowing costs for rural communities and incentivize greater private investment in agricultural development and rural infrastructure.
Purpose of Section 70435 and Its Potential Impact
The inclusion of Section 70435 signals a federal push to:
- Stimulate investment in rural America by encouraging lenders to offer more competitive financing options for agricultural and rural development projects.
- Lower the cost of capital for rural and farming communities, helping preserve family farms and support food security initiatives.
- Encourage participation by the financial services industry, including banks and insurance companies, in underserved rural markets.
If implemented effectively, this provision could benefit rural lending markets by increasing the availability of affordable credit and contributing to broader economic stimulation in agricultural regions.
Key Provisions of Section 70435
- Exclusion of Interest Income: For taxable years ending after the date of enactment (July 4, 2025), 25% of interest income received by a qualified lender on qualifying loans secured by rural or agricultural real estate will be excluded from gross income of that financial institution for federal tax purposes.
- 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 adjusted basis will be included in the bank’s calculation of the amount of interest expense deduction disallowed. With the recent increase in 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.
- Qualified Lenders:
- Any bank or savings association with deposits insured under the Federal Deposit Insurance Act
- Including certain entities wholly owned, directly or indirectly, by a company that is treated as a bank holding company under Section 8 of the International Banking Act of 1978
- Any state- or federally regulated insurance company
- Including certain entities defined in the legislation owned by an insurance holding company
- Federal Agricultural Mortgage Corporation (Farmer Mac)
- Only as it relates to interest received on a qualified real estate loan secured by real estate substantially used for production of one or more agricultural products
- Any bank or savings association with deposits insured under the Federal Deposit Insurance Act
- Qualifying Loans:
- Loan is made after July 4, 2025 (the date of enactment of the legislation)
- Must be secured by rural or agricultural real estate, or
- A leasehold mortgage (with a status as a lien) on rural or agricultural real estate
- Refinancings will not be treated as qualifying to the extent the proceeds are used to refinance (or in a series of refinancings) an original loan made before the enactment date
- Loan is made after July 4, 2025 (the date of enactment of the legislation)
- Rural or Agricultural Real Estate:
- Located in a state or a possession of the United States
- Any real property that is substantially used for the production of one or more agricultural products,
- Any real property which is substantially used in the trade or business of fishing or seafood processing, and
- Any aquaculture facility (as defined in the legislation)
Important Section 70435 Considerations for Lenders
- Tax Benefits: Qualifying financial institutions that originate qualifying loans will be able to exclude 25% of interest income — net of the associated interest expense disallowance — from taxable income, which reduces both tax liability and tax expense, creating a benefit to their net income through the lower effective tax rate.
- Loan Pricing Opportunities: With favorable tax treatment, lenders may be able to offer more competitive interest rates on qualifying loans, supporting the rural and agricultural communities served by community banks.
- Operational Readiness: Lenders should begin evaluating their loan portfolios and internal systems to:
- Identify qualifying loan products
- Implement documentation processes for qualified loan interest income and exclusion of certain refinancing proceeds
- Ensure lender awareness of eligibility criteria and impacts to loan rates
- Strategic Implications: This provision creates a tax incentive to financial institutions that lend to the agricultural and fishing industries, aiming to stimulate investment and economic activity in those sectors. Mission-driven lenders that are considered qualified lenders may be particularly well-positioned to benefit.
Next Steps
Lenders are encouraged to consult legal and tax advisors to understand how Section 70435 may affect their institution. Steps to consider:
- Review rural and agricultural lending activity for potential eligibility
- Assess operational changes needed to ensure compliance and information needed to report the tax benefit
- Evaluate the financial and strategic upside of creating or expanding agriculture-focused loan programs
How Cherry Bekaert Can Help
If your institution has any questions about Section 70435 (new IRC Section 139L) or any other provisions of the new tax legislative package, Cherry Bekaert’s dedicated Financial Institutions practice is here to support you as a trusted advisor. Our team brings deep industry insight and technical experience to help you navigate the evolving tax landscape with confidence.
In addition, our Tax Policy group is closely monitoring developments at the federal, state and local levels to ensure you stay informed about emerging opportunities and potential impacts on your organization.
Now is the time to assess how these changes could affect your lending strategies, tax planning and long-term growth. Reach out to explore how we can help you turn policy into opportunity.
