Banks generally cannot deduct the borrowing costs of holding tax-exempt securities but may deduct up to 80 percent of the carrying costs of securities from “qualified small issuers” that issue less than $10 million in a calendar year per section 265 of the Internal Revenue Code (IRC). This exemption, frequently known as the “small borrower’s exemption” or “bank qualified debt,” allows smaller communities to access tax-exempt rates more easily through bank placements and reduces their financing costs.

Why We Care

The exemption provided under section 265 helps small borrowers access affordable finance. In fact, qualified small issuers typically save between an estimated 25 – 40 basis points per transaction.[1] The current $10 million threshold, however, was set in 1986 and is no longer enough to finance most projects even in smaller communities. By raising the threshold, indexing it to inflation, and applying it to the borrower instead of the issuer, Congress and the administration can help small communities, as well as nonprofits, reduce borrowing costs for critical infrastructure projects.

NABL Stance

Congress and the Administration should raise thresholds and modernize restrictions on the small borrower’s exemption to increase affordable financing options available to small communities. NABL endorses bills on a case-by-case basis but is supportive of efforts to modernize the small borrower’s exemption. For further inquiries, email

[1] The Government Finance Officers Association (GFOA). “Bank Qualified Debt.” Web access:

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