As part of the 2023-2025 budget, Wisconsin Governor Tony Evers approved a historic provision excluding income earned on commercial loans of $5 million or less from state income tax. The first-of-its-kind legislation is intended to build on the state’s recent growth by incentivizing additional investment in business and agriculture.
What is the exemption?
Financial institutions with tax years beginning after December 31, 2022, are eligible for the exemption. Income in 2023 from interest, fees, and penalties earned from business and agricultural loans of $5 million and less are exempt from state income tax.
- Financial institutions are defined under the state statute and include banks, savings banks, saving and loan associations, and most credit unions.
What are the loan requirements?
Eligible loans must meet three specific requirements:
- Borrowers must reside or be located in Wisconsin.
- The primary purpose of the commercial loan proceeds must be for business or agriculture.
- Loans must be $5 million or less.
Loan proceeds must be used primarily for business or agricultural use as defined by existing standards in the Truth in Lending Act and Equal Credit Opportunity Act. Commercial and industrial (C&I) or commercial real estate (CRE) loans, for example, must be for the purpose of improving or expanding a business or farm operation – purchasing inventory, machinery, equipment – commercial real estate, or other commercial purposes.
Income earned on loans for home purchases, improvements, or refinancing is not exempt because the primary loan purpose would not be considered commercial.
What are additional considerations?
The exemption is determined by the primary purpose of the loan. Any collateral securing the loan does not restrict the exemption. Similarly, borrowers must reside or be located in Wisconsin, meaning the location of any guarantor does not restrict the exemption.
The exemption applies to financial institutions taxed either as a C corporation or a S corporation. S corporation banks will realize the exemption at either the entity level (if an election is made) or shareholder level.
There remain several questions on this new provision that the Wisconsin Bankers Association is working to resolve. Additional guidance from the Wisconsin Department of Revenue is expected soon.
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