Arkansas bankers have long advocated for the Access to Credit for our Rural Economy Act, better known as ACRE, which allows banks to exclude a portion of the interest income on certain agriculture loans from their gross income.
That bill’s objectives were included in the One Big Beautiful Bill Act, which was signed into law in July.
Banks had hoped to exempt all of the interest from these loans, but the OBBBA doesn’t go that far. The bill will allow banks to deduct 25% of the interest income on loans backed by qualifying rural and ag real estate.
The details of what counts as qualifying rural and agricultural real estate is yet to be determined, but we know OBBBA says land substantially used for agricultural production, the business of fishing or seafood processing or aquaculture will qualify. Eyes will be on forthcoming guidance from the Internal Revenue Service for more information.
Lorrie Trogden, president and CEO of the Arkansas Bankers Association, said the new provision will allow for more competition in agricultural lending, giving banks more room to lower interest rates on those loans.
Banks compete in agricultural lending with farm credit services, which are part of an agricultural lending system that dates back more than 100 years. The borrower-owned services operate like cooperatives with a tax-free status and often offer more attractive interest rates than banks on farm loans.
Trogden says the banking industry has been “extremely frustrated” that banks compete against farm credit services that don’t operate under the same rules. She believes ACRE will help level the playing field a bit.
The ACRE deduction only applies to federal taxes, but at least two states — Kansas and Wisconsin — have passed similar provisions at the state level.
The state Bankers Association has advocated for it in Arkansas as well. Trogden said there has been support for the bill among Arkansas legislators but other tax cut measures have taken priority. Trogden would like to see if a lesser deduction, like the 25% in the OBBBA measure, might make the bill more palatable in a future state legislative session.
I asked AgHeritage Farm Credit Services President and CEO Greg Cole about the ACRE provision. He said the legislation doesn’t directly affect the farm credit system and explained that farm credit services are co-ops owned by farmers and ranchers that return money to their owners each year through patronage payments. Cole didn’t comment or express concern about how the lending environment might change with more competition from banks.
Kyle Baltz is the president and chairman of the small, family-owned RiverBank of Pocahontas, which is primarily a farm lender. The bank started in 1974 with $17 million but has grown to around $156 million in assets and extends loans for row crops, cattle and poultry in addition to other areas.
In a call with Arkansas Business, Baltz said the farm credit services “can offer a lower rate, which is difficult for us to compete with.” The northeast Arkansas banker displayed no animosity toward the farm credit lenders, saying he understood they are simply “operating under the program that they have.” Baltz said the new tax deduction for banks under OBBBA will help banks even if it doesn’t go all the way in leveling the playing field.
“It’s not quite an apples-to-apples (situation) yet, but it’s progress and we appreciate that,” Baltz said.
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