On December 23, 2025, the Internal Revenue Service, through a fact sheet, provided answers to frequently asked questions regarding the changes to the limitation on the deduction for business interest expense under OBBBA.
If you are a business owner, it is essential that you stay informed about this change. First of all, you should know that the limitation on the deduction for business interest expense falls under Section 163(j) of the Internal Revenue Code.
The FAQ sheet shared by the IRS covers five topics, which include general information, excepted trades or businesses, determining the Section 163(j) limitation amount, CARES Act changes, and One Big, Beautiful Bill changes.
General Information
What is the Section 163(j) limitation on business interest expense?
According to Section 163(j), a taxpayer cannot fully deduct their business interest expense. The deduction is limited to the sum of the business interest income for that year, 30% of Adjusted Taxable Income (ATI), and floor plan financing interest.
Who is subject to the Section 163(j) limitation?
It applies to all taxpayers with business interest expenses, and small businesses that pass the gross receipts test and certain excepted or electing businesses are exempted from it.
What is the gross receipts test?
If a business has annual gross receipts below a certain threshold for three consecutive years, it is exempt from Section 163(j). For 2024, this threshold is $30 million, and for 2025, it is $31 million.
If receipts fall below the limit later, will Section 163(j) still apply?
No, the rule was implemented in 2024, but if the gross receipts are below the threshold in 2025, then Section 163(j) will not apply.
Accepted Trades or Businesses
Which businesses qualify as excepted trades or businesses?
Those providing service as employees, electing real property businesses, electing farming businesses, and regulated utility businesses are exempted from Section 163(j).
How does a business elect to be an excepted trade or business?
Businesses are required to attach a statement with their tax return. Once you select this option, it becomes permanently applicable.
What are the consequences of making this election?
If you elect this option for real property or a farming business, you will have to use ADS depreciation but will not receive bonus depreciation. This means that the tax benefit will be available in one area but reduced in another.
Determining the Limitation Amount
What is considered interest under Section 163(j)?
Here, interest refers to any amount paid after borrowing money, which includes loan interest, debt instruments, and some dividends and factoring income.
What is business interest expense?
Generally, interest expense related to a non-excepted business is considered business interest expense. Starting in 2026, Section 163(j) will apply first, followed by interest capitalization, with some exceptions.
What is business interest income?
Business-related interest income that is included in gross income is referred to as business interest income.
How is Adjusted Taxable Income (ATI) calculated?
To calculate ATI, first take the taxable income, then add deductions (such as interest expense and depreciation), and then subtract incomes. Note that under the new rules, depreciation will be added back again after 2025.
What happens to disallowed business interest expense?
Generally, interest income that is not claimed in the current year is carried forward to the following year and can be used for deduction in subsequent years. However, after the year 2025, i.e., from 2026 onwards, this carried-forward interest cannot be capitalized.
What is floor plan financing interest expense?
This is the interest rate that applies to loans taken out to purchase vehicle inventory, such as car dealerships; from 2026 onwards, this will also include trailers and campers.
CARES Act Changes
What relief was provided under the CARES Act?
The CARES Act provided temporary relief by increasing the adjustable taxable income limit from 30% to 50%. It allowed the use of 2019’s adjusted taxable income for the 2020 tax year. This provision was only applicable in 2019 and 2020.
One Big, Beautiful Bill (OBBB) Changes
What changed after December 31, 2024?
From December 31, 2024, onwards, the depreciation and amortization can be added to ATI, and the definition of motor vehicle has been expanded.
What changed after December 31, 2025?
From December 31, 2025, onwards, Section 163(j) will apply before interest capitalization, and CFC income will be excluded from ATI.
Disclaimer: Section 163(j) business-interest deduction updates are for general awareness only. Official rules and eligibility are determined by the IRS and federal law.
