After months of intensive legislative negotiations, Republican efforts in Congress culminated in early July. On July 1, the Senate approved its version of H.R.1 — the One, Big, Beautiful Bill (OBBB). The House followed with swift action, passing the measure on July 3, and President Trump signed it into law the next day. It introduces extensive tax reforms, including the extension of provisions from the Tax Cuts and Jobs Act (TCJA), fulfillment of campaign commitments, and modifications to existing regulations that will impact the banking industry. We delve into relevant business and individual tax provisions that may impact your institution in 2026 and beyond.
Business tax provisions
Interest exclusion: Rural and agricultural loans
Financial institutions have long played a vital role in supporting rural and agricultural economies. The OBBB adds Section 139L to the Internal Revenue Code (IRC), allowing qualified lenders to exclude 25% of interest income from eligible rural and agricultural real estate loans from federal taxable income. This tax incentive is designed to encourage more lending in rural areas.
The definition of a “qualified lender” includes:
- State or federally regulated insurance companies.
- U.S.-based subsidiaries of bank or insurance holding companies.
- FDIC-insured banks and savings associations.
- Certain federally chartered institutions within the Farm Credit System.
This inclusive approach is especially beneficial for community banks, many of which already serve rural and agricultural markets and are well-positioned to take advantage of this new incentive.
To qualify for the 25% interest income exclusion under IRC Section 139L, a loan must meet the following criteria:
- Secured by real estate classified as rural or agricultural.
- Issued by a qualified lender to a U.S.-based customer.
- Originated after July 4, 2025.
- Exclusion only applies to Interest earned after July 4, 2025.
The borrower doesn’t need to be a farmer or operate an agricultural business. However, the collateral must meet rural or agricultural standards. Eligible collateral includes:
- Real property primarily used to produce agricultural products.
- Property used in fishing or seafood processing.
- Aquaculture facilities.
These definitions ensure the tax benefit supports core rural and agricultural economic activities. A key aspect of the current guidance for the interest exclusion is that refinanced loans aren’t eligible.
For C corporations, the 25% interest income exclusion under IRC Section 139L reduces taxable income, thereby lowering the current tax expense reported on the income statement through the tax provision calculation. This exclusion creates a permanent book-to-tax difference — not a temporary timing difference — and, as a result, it doesn’t result in a deferred tax liability. This distinction simplifies tax accounting and reflects a lasting reduction in taxable income.
Section 139L updates how Section 265 of the IRC applies to tax-exempt income. Traditionally, Section 265 disallows deductions for expenses tied to tax-exempt income. Under the new provision, lenders can’t deduct expenses related to the portion of interest income that’s excluded from federal taxable income.
The disallowed expense is calculated as 25% of the adjusted basis of the qualifying tax-exempt loans. This ensures that lenders receive the benefit of the interest exclusion without also deducting related expenses.
100% bonus depreciation
Bonus depreciation will return to its initial TCJA level of 100% for property acquired after Jan. 19, 2025. The 100% bonus depreciation deduction will be permanent.
Increased Section 179 expensing
The OBBB doubles the Section 179 deduction from $1,250,000 to $2,500,000 and increases the asset acquisition limit from the current $3,130,000 to $4,000,000 (meaning that the point at which the full deduction would be phased out would be increased from $4,380,000 of asset purchases to $6,500,000 of asset purchases). These increases take effect for property placed in service in tax years beginning after Dec. 31, 2024.
Charitable contribution “floor” for corporations
Corporations are permitted to deduct charitable contributions up to 10% of taxable income. The OBBB will place a 1% floor on deductions to charitable contributions made by corporations beginning in 2026. The contributions under the floor would become permanently nondeductible unless the corporation exceeds the 10% limitation (i.e., contributions exceed 11% of taxable income) in which case the amount disallowed within the 1% floor will carry forward to prevent the same contributions from being subjected to a 1% floor across multiple years as it carries forward.
R&D expenditures under Section 174
The OBBB reinstates immediate deductions for all domestic research and experimental (R&E) expenses, a significant shift from current law, which requires a five-year amortization period. Foreign R&E costs remain unchanged and will continue to be amortized over 15 years.
Under the new rules, any remaining domestic R&D capitalized in 2022, 2023, or 2024 can be deducted in full in 2025 or spread evenly between 2025 and 2026. Additionally, certain small businesses with gross receipts under $31 million may amend returns for 2022–2024 to remove capitalization of domestic research and development (R&D).
Software development expenses will now be permanently treated as research expenses under Section 174. This is a welcome change for banks that have been able to take advantage of the R&D tax credit.
Increased threshold for 1099 reporting
The dollar threshold for information reporting on Forms 1099 for services performed has been set at $600 for many years. The OBBB increases that threshold to $2,000 beginning with respect to payments made in 2026 and indexes the amounts for inflation beginning with the 2027 calendar year.
Individual tax provisions
Impacts of the OBBB are expected to ripple out to S corporation institutions and C corporation shareholders. Here are a few relevant individual tax provisions to consider.
Tax brackets on ordinary income
The OBBB permanently extends the individual tax rates introduced under the TCJA, including the top rate of 37%; it also adds an extra year of inflation adjustments for the three lowest brackets — 10%, 12%, and 22%.
While there was some discussion about potential changes to the top bracket during the legislative process, no adjustments were made. By keeping the current structure in place, the OBBB provides consistency and predictability for taxpayers moving forward.
Qualified business income deduction (QBID)
The TCJA introduced the 20% QBID to create parity between flow-through entities and corporations, complementing the TCJA’s reduction of the corporate tax rate to 21%.
QBID comes with limitations, including income-based phaseouts for specified service businesses and reduced benefits if the business doesn’t meet certain W-2 wage or property requirements.
The OBBB makes QBID permanent and expands the income range for phaseouts. It also introduces a minimum deduction of $400 for eligible taxpayers with active business income. While the original House proposal included increasing the deduction to 23% and making more significant changes to phaseouts, these provisions were not included in the final Senate version.
The SALT cap
The annual limitation on an individual taxpayer’s deduction for state and local taxes (the SALT cap) created by the TCJA was set at the $10,000 limitation beginning in 2018.
The SALT cap will be increased from $10,000 to $40,000 ($20,000 in the case of a married taxpayer filing separately) beginning in 2025. Such amount will increase to $40,400 in 2026 ($20,200 if filing separately) and will then increase 1% per year through 2029. However, the $10,000 SALT cap will be restored for 2030 and beyond.
The increased cap will be phased down for taxpayers based on their income but will never go below $10,000. For 2025, the phaseout begins at $500,000 of modified AGI ($250,000 if married filing separately). That phaseout will be equal to 30% of income above the phaseout threshold. Accordingly, the deduction will be fully phased down to the minimum for taxpayers with $600,000 or more of modified AGI ($350,000 if married filing separately). The income-based thresholds increase to $505,000 (or $252,500 if filing separately) in 2026 and then by 1% increments thereafter.
New charitable contribution deduction floor (individual taxpayers)
Starting in the 2026 tax year, the OBBB introduces a 0.5% floor on itemized deductions for charitable contributions. This means deductions will only apply to the portion of contributions that exceeds 0.5% of an individual’s adjusted gross income (AGI).
The first 0.5% of charitable giving won’t be deductible unless contributions exceed the maximum allowable limit. In that case, the disallowed 0.5% amount can be carried forward to future years. This carryforward rule ensures the same contributions aren’t penalized multiple times as they roll over.
As the OBBB reshapes both business and individual tax rules, understanding how these provisions impact compliance, operational efficiencies, and overall risk management will be essential for confident and informed decision-making.
