IRC §163(j) limits the deductibility of business interest expense to 30% of adjusted taxable income (ATI). TCJA enacted the limitation in 2017, initially using an EBITDA-based ATI (adding back depreciation and amortization). Starting in 2022, the formula switched to EBIT (no add-back for depreciation), significantly tightening the limitation for capital-intensive businesses. OBBBA permanently restored the EBITDA-based ATI computation - one of the most important business tax changes in the Act for leveraged companies and real estate investors.
For tax years beginning after December 31, 2024, OBBBA P.L. 119-21 permanently restores the EBITDA-based ATI computation - depreciation, depletion, and amortization are added back when computing the 30% limitation base. This reverses the 2022 shift to EBIT that had significantly reduced the deductible interest for capital-intensive businesses. For a company with $10M of depreciation and $1M of EBIT, the difference is enormous: under EBIT, ATI is $1M and the deductible interest cap is $300K. Under EBITDA, ATI is $11M and the cap is $3.3M.
Business interest expense that exceeds the limitation is disallowed in the current year but carries forward indefinitely to future years. The carryforward retains its character as business interest expense and is subject to the §163(j) limitation in the year it is used.
The §163(j) limitation does not apply to taxpayers that meet the gross receipts test: average annual gross receipts of $31 million or less (2026, indexed for inflation) for the three prior tax years. For these small businesses, all business interest expense is fully deductible without limitation.
Related taxpayers must aggregate their gross receipts under the controlled group rules of IRC §448(c) when applying this test. A group of related businesses that collectively exceed the threshold is subject to §163(j) even if each entity individually falls below $31M.
| Exception | Who Qualifies | Key Condition |
|---|---|---|
| Small business | Gross receipts ≤ $31M (2026) | Must aggregate related party gross receipts; averaged over 3 years |
| Real property trade or business (RPTB) election | Any real property development, construction, rental, acquisition, or management business | Irrevocable election; must use ADS (slower) depreciation on residential and nonresidential real property and QIP |
| Farming business election | Farming businesses as defined in IRC §263A(e)(4) | Irrevocable; must use ADS depreciation on certain farm property |
| Regulated utilities | Electric, gas, water utilities with regulated rates | Rate of return regulated by government or regulatory body |
| Floor plan financing | Auto, boat, RV, heavy equipment dealers | Interest on indebtedness used to finance inventory held for sale; fully deductible |
The §163(j) limitation applies at the partnership level, not the partner level. Excess business interest expense at the partnership is allocated to partners as "excess business interest expense" (EBIE), which the partner can only use when the same partnership allocates "excess taxable income" (ETI) or "excess business interest income" to that partner in a future year. Partners cannot combine EBIE from one partnership with income from another partnership or from their own business to utilize the carryforward.
For S-corporations, the limitation applies at the S-corp level. The §163(j) limitation is calculated before pass-through to shareholders, and any disallowed interest carries forward at the S-corp level - not at the shareholder level. This is a more straightforward treatment than the partnership rules.