Section 163(j) Business Interest Limitation

Section 163(j) limits the deduction for business interest expense to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest. Disallowed interest carries forward indefinitely at the corporate level, though partnerships allocate excess business interest expense to partners under separate rules.

The definition of adjusted taxable income determines how binding the limitation is. From 2018 through 2021 the calculation added back depreciation, amortization, and depletion, producing an EBITDA-like measure. From 2022 through 2024 those add-backs disappeared, converting the base to an EBIT measure and sharply tightening the limitation for capital-intensive and heavily leveraged businesses. The One Big Beautiful Bill Act, enacted in July 2025, restored the depreciation, amortization, and depletion add-backs permanently for tax years beginning after December 31, 2024 - returning the calculation to an EBITDA basis and materially increasing deductible interest for most affected taxpayers.

Several exceptions and interactions matter. Taxpayers meeting the small business gross receipts test, based on average annual gross receipts over the prior three years and indexed for inflation, are exempt entirely, though tax shelters are excluded from the exception. Electing real property trades or businesses and farming businesses may opt out, at the cost of using the alternative depreciation system for certain assets. OBBBA also added ordering rules coordinating 163(j) with the capitalization provisions and modified the treatment of certain foreign-related interests.

Compliance runs through Form 8990. For CPA firms, 163(j) analysis is a standard component of corporate and partnership compliance for leveraged clients, and it interacts directly with debt structuring, private equity portfolio company planning, and the deferred tax accounting for disallowed interest carryforwards.