Section 163(j) caps business interest expense deductions at 30% of adjusted taxable income (ATI) plus business interest income plus floor-plan financing. OBBBA permanently restored the more generous EBITDA-based ATI calculation for tax years beginning after December 31, 2024, reversing the more restrictive EBIT-based formula that had applied since 2022. Two additional OBBBA changes take effect in 2026: capitalized interest under §263 retains its character as interest and remains subject to §163(j), and certain international tax items (Subpart F, NCTI, §78 gross-up) are excluded from ATI. The $31 million small-business gross-receipts exception remains the most important planning safe harbor.
For tax years beginning after December 31, 2024: Permanent EBITDA addback - depreciation, amortization, and depletion are added back when computing ATI. This generally increases deductible interest, especially for capital-intensive businesses. Also expands floor-plan financing to include trailers and campers.
For tax years beginning after December 31, 2025: Capitalized interest under §263(a) or §263(g) remains subject to §163(j) limitation - elective capitalization no longer escapes the limit. ATI excludes Subpart F inclusions under §951(a), NCTI inclusions under §951A, §78 gross-up, and §245A deduction amounts.
Under §163(j)(1), business interest expense deductible in any tax year is limited to the sum of:
| Component | Description |
|---|---|
| Business interest income | Interest income earned in the trade or business (Schedule B interest from operating bank accounts, for example) |
| 30% of ATI | Adjusted Taxable Income times 30% under §163(j)(1)(B). CARES Act temporarily raised to 50% for 2019/2020. |
| Floor-plan financing interest | Interest on debt secured by motor vehicle inventory under §163(j)(9). Expanded by OBBBA to include trailers and campers. |
| Total cap | Sum of the three above. Excess business interest expense ("EBIE") carries forward indefinitely. |
The §163(j) limitation does NOT apply to any taxpayer (other than a tax shelter) that meets the small-business gross-receipts test under §448(c). This is the single most important §163(j) provision for closely-held businesses.
| Tax Year | Threshold (3-Year Average Gross Receipts) |
|---|---|
| 2025 | $31 million |
| 2026 | Indexed; $32 million projected based on inflation patterns |
The threshold is measured over the immediately preceding three tax years. If 2023, 2024, and 2025 gross receipts averaged $30 million, the 2026 tax year is exempt from §163(j). The §448(c) aggregation rules under §448(c)(2) apply - related entities under common control combine gross receipts. A two-entity structure with $20 million each combines to $40 million and loses the exemption.
ATI is taxable income computed without regard to:
| ATI Adjustment | Effect | OBBBA Status |
|---|---|---|
| Any item not properly allocable to a trade or business | Excluded from ATI | Unchanged |
| Business interest expense and business interest income | Excluded (added back) | Unchanged |
| Net operating loss deduction | Added back | Unchanged |
| §199A QBI deduction | Added back | Unchanged |
| Depreciation, amortization, depletion | Added back (EBITDA) | RESTORED by OBBBA for 2025+; previously EBIT for 2022-2024 |
| Subpart F inclusions, NCTI/§951A, §78, §245A | Excluded from ATI starting 2026 | NEW under OBBBA |
Facts (Manufacturer with 2026 results): Net income before §163(j): $1,000,000. Depreciation: $500,000. Amortization: $200,000. Business interest expense: $400,000.
Pre-OBBBA EBIT method (2022-2024 rule):
ATI = $1,000,000 (no D&A addback). 30% limit = $300,000. Deductible interest = $300,000. EBIE carryforward = $100,000.
OBBBA EBITDA method (2025+ rule):
ATI = $1,000,000 + $500,000 + $200,000 = $1,700,000. 30% limit = $510,000. Deductible interest = $400,000 (full amount). No EBIE carryforward.
Result: OBBBA restoration unlocks $100,000 of additional current-year interest deduction, saving $21,000 in federal tax at the 21% corporate rate.
For tax years beginning after December 31, 2025, OBBBA closes a planning loophole. Previously, taxpayers could elect to capitalize interest under §263A or §263(g) and the capitalized interest was excluded from §163(j). Beginning 2026, the capitalized interest retains its character as interest and is subject to §163(j) before the capitalization decision.
This change primarily affects real estate developers and producers of inventory who had been using capitalization elections to bypass the §163(j) limit. The impact is most significant for:
| Affected Strategy | Effect Starting 2026 |
|---|---|
| UNICAP interest capitalization under §263A on long-period production property | Interest first tested under §163(j), then capitalized portion follows §263A treatment for the deductible portion |
| Construction interest capitalization under §263(g) | Subject to §163(j) limit before §263(g) treatment |
| Real estate developer interest on land held for sale | Subject to §163(j) limit; election to apply real property trade or business under §163(j)(7)(B) becomes more important |
An "electing real property trade or business" is exempt from §163(j) entirely. The election is irrevocable. In exchange, the trade or business must use the alternative depreciation system (ADS) under §168(g) for non-residential real property (39 years vs 27.5 years - actually correct is 40 years ADS), residential real property (30 years ADS), and qualified improvement property (20 years ADS). The §168(k) bonus depreciation is also lost on these assets.
Partnerships compute §163(j) at the partnership level. Excess business interest expense (EBIE) is allocated to partners as a separately stated item on Schedule K-1. The partner cannot deduct the EBIE in the year received - instead, it carries forward at the partner level and is deductible only against future excess taxable income (ETI) from the same partnership.
| Partner-Level EBIE Rule | Detail |
|---|---|
| EBIE is deductible only against | Future excess taxable income (ETI) or excess business interest income (EBII) from the same partnership |
| Cross-partnership netting | NOT permitted - EBIE from Partnership A cannot offset ETI from Partnership B |
| Disposition of partnership interest | Unused EBIE adjusts partner's outside basis under §163(j)(4)(B)(iii) |
| Reg §1.163(j)-6 mechanics | The "eleven-step" allocation process for partnerships under Treasury regulations |
S-corporations compute §163(j) at the entity level and carry forward any disallowed interest at the entity level. Unlike partnerships, S-corp shareholders do not receive EBIE allocations under §163(j)(4) - the limitation is resolved entirely at the corporate level.
Disallowed business interest expense (EBIE for partnerships, regular carryforward for other taxpayers) carries forward indefinitely. There is no expiration. The carryforward is treated as business interest expense paid or accrued in the succeeding tax year, subject to the §163(j) limit again in that year.
For most non-partnership taxpayers, the carryforward stacks with current-year interest in the next year's limitation calculation. A taxpayer with $100,000 EBIE from 2024 and $500,000 of current 2025 interest tests $600,000 against the 2025 limit. For partnerships, EBIE carries forward at the partner level and is only usable against future excess from the same partnership.
For tax years beginning after December 31, 2025, OBBBA excludes the following from ATI:
| Excluded ATI Item | Citation |
|---|---|
| Subpart F inclusions | §951(a) |
| NCTI (formerly GILTI) inclusions | §951A |
| §78 gross-up | §78 |
| §245A deduction amounts | §245A |
| Inclusions under §956 (investment in US property) | §956 |
This is a TIGHTENING of the limit for multinationals - excluding these items from ATI reduces the deductible interest. Multinational US shareholders of CFCs that had been treating Subpart F or NCTI inclusions as part of ATI to increase the §163(j) limit lose that planning starting 2026. The provision was designed to align §163(j) with the OBBBA international tax architecture rather than to favor or disfavor any particular industry.
Form 8990, "Limitation on Business Interest Expense Under Section 163(j)," is the reporting vehicle. Required for any taxpayer with business interest expense unless they meet the small-business exception or are an electing real property/farming trade or business.
| Form 8990 Parts | Content |
|---|---|
| Part I | Computation of allowable business interest expense for the year |
| Part II | ATI calculation (the heart of the form) |
| Part III | S-corporation specific items (entity-level limitation) |
| Schedule A (Partnerships) | Excess business interest expense allocation to partners |
| Schedule B (Partner level) | Partner's tracking of EBIE carryforward |
States have not uniformly adopted OBBBA. The §163(j) calculation may be different for federal and state purposes:
| State Approach | Examples (as of 2026) | Result |
|---|---|---|
| Rolling conformity (auto-adopts OBBBA) | Illinois, New York, Maryland | Uses OBBBA EBITDA method |
| Static conformity (frozen at pre-OBBBA IRC) | Florida, North Carolina, Wisconsin | Still uses TCJA EBIT method until legislature updates |
| Decoupled / pre-TCJA | California | Largely ignores §163(j); no state limitation |
For multi-state Clients, plan separate §163(j) calculations for federal vs. each non-conforming state. The complexity is significant for any business with meaningful state nexus footprint.
The small-business gross-receipts test aggregates related entities under common control. Two LLCs each grossing $20 million owned by the same family trust combine to $40 million and fail the small-business exception. Practitioners often run the $31 million test on the entity itself without checking aggregation.
§163(j) applies only to "business interest" - interest properly allocable to a trade or business. Investment interest under §163(d) is a separate animal subject to its own limitation. Interest on margin loans to buy stocks, for example, is investment interest, not business interest. Misclassification can run the wrong limit and produce the wrong carryforward characterization.
Under §163(j)(4)(B)(iii), when a partner disposes of the partnership interest (or it is liquidated), any remaining EBIE carryforward at the partner level increases the partner's basis immediately before the disposition. This generally produces a higher loss or lower gain on the sale. Practitioners selling partnership interests often forget to add back unused EBIE.
EBIE from Partnership A can only be used against Partnership A's future ETI. Partner-level tracking must be EBIE-by-source-partnership. A partner with EBIE from three different partnerships maintains three separate carryforward pools that never mix. Most tax software handles this through partner-level Form 8990 Schedule B tracking, but practitioners reviewing returns must verify the partnership identification stays consistent year over year.
The §163(j)(7)(B) election is made on a timely-filed (including extensions) original return for the year of election. Once made, it is irrevocable. Practitioners who realize a year later they should have elected cannot do so retroactively. Plan the election decision before filing each year.
Primary authority: IRC §163(j) (limitation on business interest), §163(j)(1) (computation formula), §163(j)(2) (carryforward), §163(j)(3) (small business and tax shelter exception), §163(j)(4) (partnership rules and EBIE allocation), §163(j)(7) (electing real property and farming trade or business), §163(j)(8) (ATI definition), §163(j)(9) (floor plan financing), §163(j)(10) (CARES Act 50% adjustment - now expired). §448(c) (gross receipts test), §168(g) (alternative depreciation system), §263A (UNICAP), §263(g) (interest capitalization for straddles). Treasury Regulations §1.163(j)-1 through §1.163(j)-11. One Big Beautiful Bill Act, P.L. 119-21 (EBITDA restoration, capitalization rule, ATI exclusions). IRS Fact Sheet FS-2025-09 (Dec. 23, 2025), IRS Form 8990 Instructions (2025), Final Regulations T.D. 9905 (Sept. 2020) and T.D. 9943 (Jan. 2021).