Update to Code Section 163(j) Expands Business Interest Deduction
July 24, 2025
By Derek Pillers, CPA/PFS
Tax Manager
The Tax Cuts and Jobs Act, enacted Dec. 22, 2017, introduced Code Section 163(j), which limits the amount of interest expense a business can deduct each year. This limit applies to taxpayers with average annual gross receipts exceeding a certain dollar threshold based on the trailing three tax years. This threshold is adjusted annually for inflation and stands at $31 million in 2025.
The 163(j) limitation calculation has seen numerous changes since 2018. The One Big Beautiful Bill Act (OBBBA) provides yet another change—one that is favorable for taxpayers subject to 163(j).
For businesses subject to 163(j), the amount of deductible business interest expense is limited to the sum of:
- Business interest income
- 30% of adjusted taxable income (ATI)
- Floor plan financing interest (mainly for vehicle and heavy equipment dealers)
If a business cannot deduct all its interest expense in one year, the excess is carried forward and used in future years when the deductible interest expense falls below the limitation.
For tax years 2022 through 2024, ATI was based on EBIT (earnings before interest and taxes), meaning depreciation and amortization expenses were included as deductions to arrive at ATI. Starting in 2025, thanks to the OBBBA, ATI is based on EBITDA. Taxpayers now add back depreciation, depletion and amortization to taxable income, which generally increases ATI and allows a larger interest deduction.
To illustrate, consider a business with taxable income (before 163(j) limitation) of $250,000, depreciation of $400,000 and business interest expense of $300,000:
|
|
2022–2024
|
2025 and After
|
|
Taxable Income
|
$250,000
|
$250,000
|
|
Depreciation
|
Not considered
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$400,000
|
|
Interest Expense
|
$300,000
|
$300,000
|
|
Adjusted Taxable Income
|
$550,000
|
$950,000
|
|
Deductible Interest Expense (30% of ATI)
|
$165,000
|
$285,000
|
|
Disallowed Interest Expense (Carried Forward)
|
$135,000
|
$15,000
|
The changes provided by the OBBBA are especially beneficial to industries that are capital intensive or rely heavily on debt financing. It’s important to work with your tax advisor to update your strategy in light of these midyear changes and ensure you’re maximizing available deductions.
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