Compliance Journal March 2024
Special Focus DOR Issues Emergency Rule to Interpret State Commercial Loan Income Exemption. On March 18, 2024, the Wisconsin Department of Revenue (DOR) published an emergency rule to clarify the commercial loan exemption under ss. 71.05(1)(i) and 71.26(1)(i), Stats., and prescribe how the $5,000,000 loan limitation is computed. The emergency rule was effective upon publication. The following is background regarding the new law and the emergency rule text. Background An important provision of 2023 Wisconsin Act 19 (also known as Wisconsin’s 2023-2025 Biennial Budget) is a new, historic tax-exemption for banks related to certain business and agricultural lending. Act 19 created new sections 71.05(1)(i) and 71.26(1)(i). This has been an advocacy priority for WBA for quite some time. Section 71.05 provides a list of exemptions and excluded income which are exempt from taxation under an income computation for individuals and fiduciaries. New section 71.05(1)(i) reads as: Commercial loans. Income from a tax-option corporation that is a financial institution, as defined in s. 69.30(1)(b), including interest, fees, and penalties, derived from a commercial loan of five million dollars or less provided to a person residing or located in this state and used primarily for a business or agricultural purpose. Section 71.26 provides a list of exemptions and excluded income which are exempt from taxation under an income computation for corporations. New section 71.26(1)(i) reads as: Commercial loans. Income of a financial institution, as defined in s. 69.30(1)(b), including interest, fees, and penalties, derived from a commercial loan of five million dollars or less provided to a person residing or located in this state and used primarily for a business or agricultural purpose. On March 12th, the Senate concurred on a technical correction to Act 19 (SB 616) which is meant to clarify the new tax exemption. Governor Evers is expected to call for the bill early for his signature. SB 616 creates new section 71.365(4m)(d)1.bd. which reads as: “For taxable years beginning after December 31, 2022, the income exclusion under s. 71.05(1)(i) shall be allowed.” This new section is important to clarify that tax-option banks that elect to pay franchise or income tax at the entity level may avail themselves of the exemption for certain excluded income that is available under section 71.05(1)(i). SB 616 amended the new section 71.05(1)(i) to read as: Commercial loans. Income of a tax-option corporation that is a financial institution, as defined in s. 69.30(1)(b), including interest, fees, and penalties, derived from a commercial loan of five million dollars or less provided to a person residing or located in this state and used primarily for a business or agricultural purpose in this state. The underlined words are the changes made to section 71.05(1)(i) from that which was previously created under the language of the 2023-2025 Biennial Budget. SB 616 makes a similar amendment to section 71.26 as was made to section 71.05(1)(i) to include “in this state” to the purpose of the commercial loan. Under SB 616 section 71.26(1)(i) now reads as: Commercial loans. Income of a financial institution, as defined in s. 69.30(1)(b), including interest, fees, and penalties, derived from a commercial loan of five million dollars or less provided to a person residing or located in this state and used primarily for a business or agricultural purpose in this state.