The ability to deduct business interest expense is a significant tax benefit, especially for companies that rely on debt to fund operations and growth. However, that deduction has been subject to limits under Section 163(j) of the Internal Revenue Code, a provision that was overhauled by the 2017 Tax Cuts and Jobs Act (TCJA) and subsequently modified by the CARES Act. Now, with the enactment of the One Big Beautiful Bill Act (OBBBA), the rules are changing again—offering relief to many capital-intensive businesses.
A Refresher on Section 163(j)
Section 163(j) limits the deduction for business interest expense to the sum of:
- Business interest income,
- 30% of adjusted taxable income (ATI), and
- Any floor plan financing interest expense.
This limitation applies to most businesses, unless they qualify for one of several exceptions, such as meeting the small business gross receipts test or operating as certain types of real property or farming businesses that make specific elections.
From 2018 to 2021, ATI was calculated by adding back depreciation, amortization, and depletion—resulting in a more generous EBITDA-based limitation. But starting in 2022, those addbacks were disallowed, shifting to a stricter EBIT-based formula and reducing the interest deduction for many businesses.
The OBBBA’s Key Change: Return to EBITDA
Beginning in tax years starting after December 31, 2024, the OBBBA reverses this tightening. It restores the EBITDA-based method of calculating ATI by once again allowing businesses to add back depreciation, amortization, and depletion. This single change significantly increases the 30% limitation threshold, allowing companies to deduct a greater portion of their interest expense.
This change provides substantial relief to businesses, particularly those in capital-intensive industries such as manufacturing, real estate, and technology. By including depreciation and amortization in the ATI calculation, companies can work with a larger base, leading to higher allowable deductions. This is especially meaningful in today’s high interest rate environment, where borrowing costs have increased and interest deductions are more critical to managing cash flow. The restored flexibility creates new opportunities for businesses to reassess their debt arrangements and pursue financing strategies that may have previously been less tax-efficient under the EBIT model.
Example: A business with $1 million in taxable income and $650,000 in interest expense could only deduct $495,000 under the 2022-2024 EBIT formula. However, under the 2025 OBBBA rules, if it also has $450,000 in depreciation, its ATI increases to $1.45 million, and the deductible interest rises to $630,000. That’s a $135,000 swing—cash that stays in the business.
Additional Changes Under the OBBBA
- Raised Gross Receipts Threshold: The OBBBA increases the gross receipts threshold for the small business exemption from $29 million to $31 million for 2025. Businesses under this limit can continue to deduct all their interest expense, avoiding the Section 163(j) limitation altogether.
- Changes to Capitalized Interest: Starting in 2026, business interest expense that is electively capitalized to property (a planning strategy previously used to defer deductions) will still be treated as interest and remain subject to the Section 163(j) limitation. This removes a previously available workaround and may alter how some businesses approach financing and asset acquisition.
- International Adjustments: OBBBA also excludes certain international tax items from the ATI calculation, such as Subpart F income and the Section 78 gross-up. These changes may impact multinational businesses with controlled foreign corporations (CFCs) and necessitate a reevaluation of global tax structures.
- Expanded Floor Plan Financing Exception: The definition of qualifying floor plan financing interest now includes interest tied to non-self-propelled recreational trailers and campers. While niche, this adjustment reflects Congress’s intent to fine-tune the application of Section 163(j).
Planning Ahead
The return to EBITDA-based calculations under Section 163(j) presents a strategic opportunity—but also new challenges. Businesses should:
- Model the impact of the restored deduction rules across multiple years to better understand their tax position and potential cash flow benefits.
- Reevaluate financing strategies in light of higher deductible interest allowances and potential limitations on capitalized interest.
- Coordinate with other tax changes, such as the treatment of R&D costs and permanent 100% bonus depreciation, to fully align tax strategy with capital investment plans.
- Review international tax structures, especially if the business includes foreign entities affected by the new ATI exclusions.
The OBBBA’s revisions to Section 163(j) offer a welcome reprieve for many businesses, particularly those in asset-heavy industries. By increasing the threshold for deductibility and restoring favorable ATI treatment, Congress has reintroduced flexibility into a previously restrictive provision. However, the loss of elective capitalization and the nuanced changes to ATI calculations necessitate careful planning.
Businesses should begin updating their models, reassessing financing plans, and working closely with their tax advisors to take full advantage of these changes—before they become tomorrow’s compliance headaches. Contact your Stephano Slack tax manager or partner at 610-687-1600 or TaxInfo@StephanoSlack.com for personalized guidance tailored to your unique situation.
Author Joshua Greenbaum, CPA, is a manager in Stephano Slack’s Marlton, NJ office, bringing extensive tax and audit expertise to his clients. Known for his collaborative approach, Josh works closely with individuals at every level, from business owners to bookkeepers. He simplifies complex financial issues, helping clients make informed decisions with confidence. Josh’s dedication to maximizing client benefits shines in times of uncertainty. With his expertise in navigating complex programs and strategies, Josh helps clients secure optimal outcomes even in challenging circumstances. He can be contacted at 856-489-0222 ext. 3415 or Jgreenbaum@Stephanoslack.com.
Disclaimer: This content is for informational purposes only and doesn’t constitute professional advice.
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