14.7 §163(j) Business Interest Expense Limitation
Key Takeaways
- §163(j) limits net business interest expense to 30% of Adjusted Taxable Income (ATI).
- OBBBA permanently restored ATI to an EBITDA basis effective 2025 — depreciation, amortization, and depletion are ADDED BACK.
- Pre-OBBBA (2022–2024): ATI was an EBIT figure (no add-back) — a much smaller base.
- Small business exception: average annual gross receipts ≤ $31M (2025, §448(c)) → fully exempt.
- Disallowed interest carries forward indefinitely at the entity level.
- Real-property and farming businesses may elect out (must use ADS depreciation — trade-off).
Why This Matters for the Exam
The §163(j) business interest limit is a high-yield testable area, and OBBBA made a major permanent change for Tax Year 2025: ATI is now computed on an EBITDA basis (add back depreciation, amortization, and depletion), restoring the more favorable TCJA-original rule that was scheduled to expire after 2021 and that became EBIT-only for 2022–2024.
Expect 2-3 questions on §163(j) for 2025.
The Basic Limit
For any tax year, the business interest deduction is capped at the sum of:
- Business interest income, plus
- 30% of Adjusted Taxable Income (ATI), plus
- Floor plan financing interest (auto dealers, etc.).
Disallowed interest carries forward indefinitely (at the C-corp or partnership level; partners get a separate basis/excess-interest mechanism).
What Changed in 2025 — OBBBA Restored EBITDA-Basis ATI (PERMANENT)
| Period | ATI Basis | Add-Back Items |
|---|---|---|
| 2018–2021 (TCJA original) | EBITDA | Depreciation, amortization, depletion |
| 2022–2024 | EBIT | None (smaller base → tighter limit) |
| 2025 forward (OBBBA permanent) | EBITDA | Depreciation, amortization, depletion added back |
Because EBITDA is a larger number than EBIT, the 30% × ATI cap is correspondingly larger — meaning more interest is deductible in 2025 than under the 2022–2024 rule. This is a significant, taxpayer-favorable, permanent change made by the One Big Beautiful Bill Act, signed July 4, 2025, and applies retroactively to tax years beginning after December 31, 2024.
Adjusted Taxable Income (ATI) Formula — 2025 (EBITDA)
Start with taxable income before §163(j), then add back:
| Add Back | Code Reference |
|---|---|
| Business interest expense | §163(j)(8)(A)(i) |
| NOLs | §163(j)(8)(A)(ii) |
| QBI deduction (§199A) | §163(j)(8)(A)(iii) |
| Depreciation (§167/§168) | §163(j)(8)(A)(v) — RESTORED 2025 |
| Amortization | §163(j)(8)(A)(v) — RESTORED 2025 |
| Depletion | §163(j)(8)(A)(v) — RESTORED 2025 |
Subtract:
| Subtract | |
|---|---|
| Business interest income | |
| Floor plan financing interest |
Small Business Exception (§163(j)(3))
| Year | Threshold (§448(c) test) | Effect |
|---|---|---|
| 2024 | $30M average gross receipts | Fully exempt from §163(j) |
| 2025 | $31M average gross receipts | Fully exempt |
A taxpayer that meets the §448(c) small-business gross receipts test (using the same $31M figure that exempts a business from cash-method, UNICAP, and inventory rules) is not subject to §163(j) at all — all business interest is deductible (subject only to the usual ordinary-and-necessary rules). Tax shelters and certain syndicates are still subject regardless.
Election Out for Real Property / Farming Businesses
Eligible real property trades or businesses (§163(j)(7)(B)) and farming businesses (§163(j)(7)(C)) may elect out of §163(j). The trade-off:
- Real property: Must use the Alternative Depreciation System (ADS) for nonresidential real property (40 yrs), residential rental (30 yrs), and qualified improvement property (20 yrs). Loses bonus depreciation on those assets.
- Farming: Must use ADS for property with a recovery period of 10 years or more.
The election is irrevocable.
Worked Example — EBITDA vs. EBIT Side-by-Side (Tax Year 2025)
Facts: Mid-sized manufacturing C-corp; gross receipts $80M (above small-business threshold). 2025 results:
| Line Item | Amount |
|---|---|
| Net income before interest and tax | $5,000,000 |
| Depreciation expense | $3,000,000 |
| Amortization expense | $500,000 |
| Business interest expense | $2,200,000 |
| Business interest income | $100,000 |
ATI (EBITDA basis — 2025 OBBBA rule):
Taxable income before §163(j) deduction (and before NOL/QBI): $5,000,000 − $2,200,000 + $100,000 = $2,900,000.
Add back: business interest ($2,200,000), depreciation ($3,000,000), amortization ($500,000) = $5,700,000 in add-backs.
Subtract: business interest income ($100,000).
ATI (EBITDA) = $2,900,000 + $5,700,000 − $100,000 = $8,500,000
30% cap = $8,500,000 × 30% = $2,550,000 allowable from ATI.
Plus business interest income: $100,000.
Total deductible interest cap (2025): $2,650,000.
Since actual business interest = $2,200,000 ≤ $2,650,000 → all $2,200,000 is deductible in 2025. No carryforward.
ATI (EBIT basis — hypothetical 2024 rule, for comparison):
Same starting figure, but do not add back depreciation or amortization.
ATI (EBIT) = $2,900,000 + $2,200,000 (interest only) − $100,000 = $5,000,000.
30% cap = $5,000,000 × 30% = $1,500,000.
Plus interest income: $100,000.
Total deductible cap (EBIT) = $1,600,000.
Deductible: $1,600,000. Disallowed: $2,200,000 − $1,600,000 = $600,000 carryforward.
Bottom line: Under OBBBA's 2025 EBITDA rule, the same facts produce a deduction $600,000 larger than under the 2022–2024 EBIT rule. This is the central testable concept: depreciation and amortization add-backs are restored in 2025 and are permanent.
On the Exam
Expect 2-3 questions, typically:
- Add-back questions: "What is added back to compute ATI in 2025?" (depreciation, amortization, depletion — EBITDA basis).
- Threshold questions: "What is the 2025 small-business gross receipts exemption?" ($31M).
- Carryforward questions: "What happens to disallowed business interest?" (Indefinite carryforward.)
The key is to remember: 30% of ATI. ATI = EBITDA for 2025 (OBBBA permanent). Small business $31M = totally exempt. Real property/farming may elect out (must use ADS). Carryforward indefinite.
For Tax Year 2025, which items are ADDED BACK in computing ATI under §163(j) after OBBBA?
A manufacturing partnership has $28M average gross receipts (prior 3 years) for Tax Year 2025. How does §163(j) apply?
C-corp in 2025 has business interest expense of $2,200,000 and ATI (EBITDA basis) of $8,500,000 and business interest income of $100,000. Deductible business interest?