Section 163(j) limits business interest expense deductions to 30% of Adjusted Taxable Income (ATI) plus business interest income. The ATI calculation is the key lever, and the OBBBA just made it significantly more favorable.
What Changed Under OBBBA
From 2018 through 2021, businesses added back depreciation, amortization, and depletion when computing ATI (an EBITDA approach). Starting in 2022, the TCJA let that addback expire. ATI dropped to EBIT-only, meaning lower ATI, a lower 30% cap, and less deductible interest. For capital-intensive businesses carrying large depreciation schedules, the result was disallowed interest piling up as indefinite carryforwards.
The OBBBA permanently reversed this shift. For tax years beginning after December 31, 2024, businesses may again add back depreciation, amortization, and depletion when computing ATI.
Example: A business with $500,000 in EBIT and $200,000 of annual depreciation:
- Under old EBIT rules: ATI = $500,000, 30% cap = $150,000 deductible
- Under OBBBA EBITDA rules: ATI = $700,000, 30% cap = $210,000 deductible
- Net gain: $60,000 more in deductible interest expense per year
Who This Affects Most
Capital-Intensive Businesses
The D&A addback directly expands your deductible interest base. The higher your annual depreciation and amortization, the larger the benefit. If you accumulated carryforward disallowances from 2022 through 2024, those amounts carry forward indefinitely under §163(j)(2) and can be absorbed against the expanded 30% ATI limit in future years. Prioritize running a 2025 ATI recalculation to quantify the improvement.
Real Estate Businesses: Election Withdrawal
Some real estate businesses previously opted out of §163(j) entirely by making the real property trade or business election under §163(j)(7). That election came at a cost: mandatory ADS depreciation on nonresidential real property (40-year life vs. 39-year MACRS). Rev. Proc. 2026-17 now allows withdrawal of elections made in tax years 2022, 2023, or 2024. The deadline is the earlier of October 15, 2026, or the statute of limitations for the election year. Withdrawing restores MACRS depreciation while the restored EBITDA-based ATI reduces the §163(j) burden.
Small Businesses: Check Your Exemption
Businesses with average annual gross receipts of $32 million or less (the 2026 inflation-adjusted §448(c) threshold) are fully exempt from §163(j). If you are near this threshold, review the aggregation rules carefully. Controlled groups, affiliated service groups, and commonly controlled businesses are aggregated for purposes of the gross receipts test.
Disallowed Interest Carryforwards
Any interest expense disallowed under §163(j) carries forward indefinitely. Businesses that accumulated carryforwards during the 2022-2024 EBIT period now have more room to absorb them, since the larger EBITDA-based ATI produces a higher 30% cap each year. Model how quickly your carryforward balance will be exhausted under the new rules.
Reporting: Form 8990
Track this calculation on Form 8990 (Limitation on Business Interest Expense Under Section 163(j)). Partnerships and S corporations compute the limitation at the entity level and pass results through to partners and shareholders on Schedule K-1. Partners and shareholders then apply their allocable share on their own Form 8990.
The OBBBA changes to §163(j) are one of the most significant business interest deduction improvements in years. If your business was constrained by the 2022-2024 EBIT rules, it is worth recalculating now. For help modeling the impact on your specific situation, contact TS CPA.