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.
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
Question types to practice:
- 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?
Only business interest expense and NOLs
Business interest expense, NOLs, and the QBI deduction
Business interest expense, NOLs, QBI deduction, depreciation, amortization, and depletion
Only depreciation and amortization
A manufacturing partnership has $28M average gross receipts (prior 3 years) for Tax Year 2025. How does §163(j) apply?
Subject to 30% of EBIT-basis ATI
Subject to 30% of EBITDA-basis ATI
Fully exempt under §163(j)(3) small business exception ($31M for 2025)
Must elect out and use ADS depreciation
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?
$2,550,000 — limited to 30% of ATI
$2,650,000 — 30% of ATI plus interest income, but only actual interest of $2,200,000 is needed
$1,600,000 — limited to EBIT cap
$2,100,000 — must exclude interest income
Sections you finish are checked off in the contents.