Key Takeaways
- Interest deduction limited to 30% of ATI.
- Small business exemption (Tax Year 2024): $30 million gross receipts.
- EBITDA standard: add back depreciation/amortization.
- Disallowed interest: carried forward indefinitely.
- Real property/farming: can elect out but must use ADS.
- Floor plan financing: fully deductible.
Last updated: January 2026
Business Interest Limitation (163(j))
Why This Matters for the Exam
The interest limitation is tested for large businesses. Know the 30% limit, the exemption threshold, and the EBITDA calculation.
Expect at least 2-3 questions on §163(j).
The 30% Limitation
| Element | Description |
|---|---|
| Limit | Business interest income + 30% of ATI + floor plan interest |
| ATI | Adjusted Taxable Income |
| Excess | Carried forward indefinitely |
Adjusted Taxable Income (ATI)
| Add Back | Amount |
|---|---|
| Taxable income | Start |
| + Depreciation | Yes (EBITDA) |
| + Amortization | Yes (EBITDA) |
| + Depletion | Yes (EBITDA) |
| + Interest expense | Yes |
| - Interest income | Yes |
Small Business Exemption
| Tax Year | Gross Receipts Threshold |
|---|---|
| 2023 | $29 million |
| Tax Year 2024 | $30 million |
| 2025 | $32 million |
Test: Average gross receipts for prior 3 years ≤ threshold.
Exempt Businesses
| Type | Requirement |
|---|---|
| Small business | ≤$30 million (Tax Year 2024) |
| Real property (elected) | Must use ADS depreciation |
| Farming (elected) | Must use ADS depreciation |
Carryforward
| Rule | Description |
|---|---|
| Disallowed interest | Carried forward indefinitely |
| No carryback | Forward only |
| Use | When ATI allows |
163(j) Calculation Example
| Item | Amount |
|---|---|
| Taxable income (before interest) | $10,000,000 |
| + Depreciation | $5,000,000 |
| ATI (EBITDA) | $15,000,000 |
| × 30% | $4,500,000 |
| Interest expense | $6,000,000 |
| Deductible | $4,500,000 |
| Carryforward | $1,500,000 |
Elect-Out Trade-Off
| Election | Consequence |
|---|---|
| Real property elects out | Full interest deduction |
| BUT must use ADS depreciation | |
| Slower depreciation = lower deductions |
Real-World Scenario
Scenario: Manufacturer with $100M gross receipts. Taxable income $10M, depreciation $5M, interest $6M.
- ATI: $10M + $5M = $15M.
- 30% limit: $15M × 30% = $4.5M.
- Deductible interest: $4.5M.
- Carryforward: $1.5M.
On the Exam
Expect 2-3 questions on interest limitation, typically:
- Threshold Questions: "What is the Tax Year 2024 exemption?"
- ATI Questions: "What is added back to calculate ATI?"
- Elect-Out Questions: "What is the consequence of electing out?"
The key is to remember: 30% of ATI. Add back depreciation/amortization (EBITDA). $30M exemption (Tax Year 2024). Elect out = use ADS.
Test Your Knowledge
Tax Year 2024 gross receipts exemption threshold for §163(j)?
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B
C
D
Test Your Knowledge
What is added back to calculate ATI under EBITDA?
A
B
C
D
Test Your Knowledge
Real estate company elects out of §163(j). Consequence?
A
B
C
D