Businesses that rely on debt financing should be familiar with Internal Revenue Code Section 163(j), the rule that limits how much interest expense a business can deduct each year. The current version of Section 163(j) was enacted as part of the Tax Cuts and Jobs Act (TCJA). Since then, it has been one of the most significant provisions affecting capital‑intensive and highly leveraged businesses, whether in the form of corporations, partnerships, or sole proprietorships.
The One Big Beautiful Bill Act (OBBBA) passed in 2025 made important changes to how this limitation is calculated. Those changes generally increase the amount of interest expense many businesses can deduct, beginning in 2025.
What is Section 163(j)?
Section 163(j) limits the annual deduction for business interest expense. In general, a taxpayer’s deductible business interest for a year is capped at the sum of: (1) business interest income, (2) 30% of Adjusted Taxable Income (ATI), and (3) floor‑plan financing interest. Any excess business interest is carried forward to future years.
The Importance of Adjusted Taxable Income (ATI)
ATI is the key driver of the Section 163(j) limitation. Because the interest deduction is generally limited to 30% of ATI, changes in how ATI is calculated can significantly affect how much interest a business may deduct in a given year.
How ATI Has Changed Over Time
Pre‑2022: EBITDA‑Based ATI
For taxable years beginning before Jan. 1, 2022, ATI was calculated in a manner similar to EBITDA. Depreciation, amortization, and depletion were added back, generally allowing a larger interest deduction.
2022–2024: EBIT‑Based ATI
For taxable years beginning after Dec. 31, 2021, and before Jan. 1, 2025, depreciation, amortization, and depletion were no longer added back. This EBIT‑style calculation significantly reduced allowable interest deductions for many businesses.
OBBBA Change Beginning in 2025
The OBBBA restored an EBITDA‑based ATI calculation for taxable years beginning after Dec. 31, 2024. This change generally increases ATI and allows businesses to deduct more interest expense.
Foreign Income Adjustments Beginning in 2026
Beginning in 2026, ATI must be reduced by certain foreign income items and related deductions, including Subpart F income, Net CFC Tested Income (GILTI), Section 78 gross‑ups, and related deductions. These rules are intended to prevent double counting of foreign income.
Capitalized Interest Considerations
Businesses that construct or produce long‑term assets should also be aware of new ordering rules affecting capitalized interest beginning in 2026. Under these rules, interest expense must be tested under Section 163(j) before being capitalized into asset basis, which may result in additional disallowed interest carryforwards.
For a deeper discussion, see our companion article, “Capitalized Interest and Section 163(j: New Ordering Rules for 2026.”