Section 163(j) limits deductible business interest to business interest income plus 30% of adjusted taxable income (ATI) plus floor plan financing interest. For tax years beginning after 2024, the One Big Beautiful Bill Act restored the depreciation and amortization add-back, so ATI is EBITDA-based again. Businesses with average gross receipts of $32 million or less are exempt for 2026.
Section 163(j) restricts how much business interest expense a taxpayer can deduct in a year. The Tax Cuts and Jobs Act of 2017 expanded it to almost all businesses, and the One Big Beautiful Bill Act (OBBBA, signed July 4, 2025) loosened the calculation again from 2025.
The limitation applies to C corporations, S corporations, partnerships, sole proprietors and trusts with business interest expense. The main exceptions are small businesses that meet the gross receipts test, electing real property trades or businesses, electing farming businesses and certain regulated utilities.
A business that is not a tax shelter is exempt if its average annual gross receipts for the three prior tax years do not exceed the Section 448(c) threshold: $30 million for 2024, $31 million for 2025 and $32 million for 2026 (see Rev. Proc. 2025-32). Aggregation rules require you to combine receipts of related entities.
Deductible business interest expense is limited to: business interest income + 30% of ATI + floor plan financing interest expense. Business interest income is interest income from your trade or business. Floor plan financing interest (mainly dealer inventory financing, which now also covers certain trailers and campers) is fully deductible.
ATI starts with taxable income computed without regard to Section 163(j) and then makes adjustments. Add back business interest expense, NOL deductions, the Section 199A deduction and non-business items, and subtract business interest income and floor plan financing interest. For tax years beginning after December 31, 2024, you also add back depreciation, amortization and depletion, which had been excluded for 2022 through 2024.
For tax years beginning after December 31, 2025, certain controlled foreign corporation inclusions (such as Subpart F and GILTI-type amounts) are excluded from ATI, which can reduce ATI for U.S. shareholders of CFCs. Strategic tax planning should take both changes into account.
From 2022 through 2024, ATI was effectively EBIT-based because depreciation, amortization and depletion could not be added back. This hurt capital-intensive businesses, especially those claiming bonus depreciation. The OBBBA restored the add-back for tax years beginning after 2024, so ATI is again roughly EBITDA-based.
A simple illustration: a company has $900,000 of business interest expense, earnings before interest and taxes of $1,000,000 and $1,500,000 of depreciation. Under the 2022-2024 rule, ATI was about $1,000,000 and the limit about $300,000, so about $600,000 was disallowed. Under the rule for 2025 and later, ATI is about $2,500,000 and the limit about $750,000, so only about $150,000 is carried forward. Actual results depend on the other ATI adjustments.
Because permanent 100% bonus depreciation is back for property acquired after January 19, 2025 (IRS Notice 2026-11), large first-year depreciation no longer shrinks the interest limit the way it did in 2022-2024.
For partnerships, Section 163(j) applies at the partnership level. The partnership calculates its limitation on Form 8990. Disallowed interest (excess business interest expense, or EBIE) is allocated to partners, and each partner carries forward its share.
A partner can deduct carried-forward EBIE in a later year only to the extent the same partnership allocates it excess taxable income or excess business interest income. If you dispose of your partnership interest while EBIE remains, it is generally not deductible as interest; instead it generally increases your basis immediately before the disposition.
For S corporations, the limitation applies at the corporate level and the S corporation itself carries forward disallowed interest rather than passing it to shareholders. Understanding entity structure differences matters when Section 163(j) applies.
Small business exemption. If you meet the gross receipts test ($32 million for 2026) and are not a tax shelter, Section 163(j) does not apply. Watch the aggregation rules: combined receipts of commonly controlled entities determine eligibility.
Electing real property trade or business. A real property development, construction, rental, management, leasing or brokerage business can elect out of the limitation. The cost: nonresidential real property, residential rental property and qualified improvement property must be depreciated under the alternative depreciation system (ADS) and cannot take bonus depreciation. The election is generally irrevocable once made. Rev. Proc. 2026-17 gives transition relief allowing certain taxpayers who made the election for 2022-2024 to withdraw it, because the restored EBITDA-based ATI may make the election unnecessary.
Electing farming business. A similar election applies; property with a recovery period of 10 years or more must use ADS. Regulated utility trades or businesses are excepted.
With the EBITDA-based ATI back and 100% bonus depreciation permanent, many real estate businesses should re-model whether electing out is still worthwhile: compare the value of faster depreciation against the interest that would actually be disallowed.
Capitalizing interest no longer helps. The OBBBA made clear that Section 163(j) applies to business interest whether it would otherwise be deducted or capitalized, apart from interest capitalized under Sections 263(g) and 263A(f). The IRS describes this as a clarification rather than a change in its position.
Debt and equity mix is still a lever. Replacing some debt with equity reduces interest expense; dividends are not deductible, so model the after-tax cost before restructuring.
Timing also matters. Projecting ATI each year shows whether accelerating income or deferring certain deductions will let you use carryforwards sooner. Recent tax law changes make this modeling more important.
Disallowed interest is carried forward to the next tax year and treated as business interest paid in that year. For C corporations, carryforwards can be used in future years with enough ATI; track them on Form 8990. Consolidated groups face additional restrictions, such as SRLY rules.
Partnerships allocate EBIE to partners, who carry it forward individually. S corporations carry forward at the entity level. Careful records are essential.
When carryforwards build up with little prospect of use, companies may need valuation allowances for financial reporting. Virtual CFO services can model long-term tax positions.
Form 8990 is generally required for taxpayers subject to the limitation, and for those with carried-forward disallowed interest, unless they qualify for the small business exemption or operate only excepted trades or businesses. The December 2025 revision of the Form 8990 instructions reinstates the depreciation, amortization and depletion adjustment in the ATI calculation.
The form walks through ATI, business interest income and expense, the limitation (business interest income + 30% of ATI + floor plan financing) and the amount carried forward. Partnerships complete Form 8990 at the partnership level and report results to partners on Schedule K-1. Common errors include misclassifying investment interest, missing NOL and 199A add-backs, using the old EBIT-based ATI for 2025 and later years, and failing to track carryforwards.
No. Investment interest is excluded from Section 163(j) and remains subject to the separate investment interest limitation under Section 163(d). Only interest properly allocable to a trade or business falls under Section 163(j). Investment interest is limited to net investment income and carries forward under different rules.
It depends on whether your rental activity is a trade or business or an investment activity. If it is a trade or business, the interest is business interest subject to Section 163(j) unless you qualify for the small business exemption or make the real property trade or business election. Most small landlords fall under the gross receipts threshold.
You must allocate interest expense between excepted and non-excepted activities, generally based on the relative basis of assets used in each. Interest allocable to excepted businesses (such as an electing real property trade or business) is not subject to Section 163(j). Interest allocable to non-excepted businesses is.
Section 163(j) applies first, limiting business interest expense. Then the at-risk rules apply, and finally the passive activity loss rules if relevant. Interest that is allowed under Section 163(j) but suspended under the at-risk or passive loss rules carries forward under those provisions, not as disallowed business interest.
Yes. Section 163(j) applies to CFCs with modifications, including an optional CFC group election. Separately, for tax years beginning after 2025, U.S. shareholders can no longer increase their own ATI by CFC income inclusions. CFC structures need specialist review.
Disallowed interest is not part of an NOL; it carries forward separately as disallowed business interest. Your other deductions can still produce an NOL, which is subject to its own limitation rules.
Keep documentation of all debt, interest calculations, ATI adjustments (including depreciation now added back), and allocations between excepted and non-excepted businesses. Track carryforwards annually with supporting schedules. Partnerships should keep records of each partner's EBIE, excess taxable income and excess business interest income.
Since 2015, we've processed over 50,000 tax returns for U.S. CPA firms, including Section 163(j) calculations across multiple entity structures. Our offshore accounting team handles Form 8990 preparation, ATI computations, carryforward tracking and planning, including reviewing whether real property elections still make sense under the post-OBBBA rules.
The return of EBITDA-based ATI makes Section 163(j) less restrictive than it was in 2022-2024, but the gross receipts test, the real property election and the new CFC and capitalization rules still need careful planning.
Since 2015, Madras Accountancy has processed over 50,000 tax returns for U.S. CPA firms. Our team stays current on Section 163(j) regulations and planning strategies.
For CPA firms: Madras Accountancy supports U.S. CPA firms with tax preparation and planning. See our tax preparation and planning services.
The section 4960 excise tax is 21% of nonprofit pay over $1M. From 2026 it covers all employees. See the medical carve-outs, Form 4720 and a worked example.
The paid family and medical leave tax credit is permanent from 2026. See the 12.5% to 25% rates, the premium option, the 6-month rule and how Form 8994 works.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
