New Income Exemption for Wisconsin Financial Institutions

Small Business Loans

Key Takeaways

  • As part of the 2023-2025 budget, Wisconsin introduced a state income tax exemption for income earned on commercial loans of $5 million or less.
  • Financial institutions with tax years starting after December 31, 2022, are eligible.
  • Loans qualifying for the state income tax exemption must be clearly documented, including original loan amount and purpose.

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. While eligibility began for financial institutions with tax years beginning after December 31, 2022, there were a number of outstanding administrative questions. Recently, the Wisconsin Department of Revenue released guidance to assist financial institutions claiming the exemption on their 2023 Wisconsin tax returns.

What is the exemption?

Beginning on January 1, 2023, income derived from borrowers of commercial loans such as interest, fees, and penalties may be exempt from state income tax. This exemption is allowed on business and agricultural loans with an original loan obligation of $5 million or less.

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 specific requirements:

  • The loan must be a commercial loan.
  • 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 when originated.

Loan proceeds must be used primarily, meaning 75% or more, 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. While 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?

When taking the income exemption, financial institutions must clearly identify and document the purpose of the loan. Consideration of the $5 million loan limit should be given if a borrower obtains multiple loans. For example, if a borrower obtains multiple loans of $5 million or less for the same qualifying purpose, but in total the loans aggregate to more than $5 million, the loans would not be eligible for the exemption. The loan’s purpose and qualifying use determine whether loan aggregation is required.

Commercial loans acquired through purchase, assignment, or participation are eligible for the income exclusion. If the original loan is $5 million or less, and all other requirements are met, both the purchasing and selling financial institutions may claim an exemption for their proportionate share of loan income.

The Wisconsin Department of Revenue has developed a Commercial Loan Income Exemption Frequently Asked Question (FAQ) page that provides explanations and definitions for a number of key provisions of the exemption.

The exemption applies to financial institutions taxed either as a C corporation or a S corporation. Because of differences in how these entities are taxed, financial institutions must carefully consider the effect of the income exclusion on taxable income, the entity, and shareholders.

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