16.6 Business Interest Limitation (163(j))
Key Takeaways
- Business interest deduction limited to business interest income + 30% of ATI + floor plan financing interest.
- OBBBA permanently restored the EBITDA-basis ATI (add back depreciation, amortization, depletion) effective for tax years beginning after Dec. 31, 2024.
- Small business exemption (Tax Year 2025): average gross receipts ≤ $31 million (§448(c) threshold).
- Disallowed interest carries forward indefinitely (no carryback).
- Real property trade or business / farming: may elect out, but must use ADS depreciation.
- Floor plan financing interest is fully deductible (and excluded from the limitation).
Why This Matters for the Exam
The §163(j) interest limitation has been a moving target. The One Big Beautiful Bill Act (OBBBA, signed July 4, 2025) permanently restored the more favorable EBITDA-basis ATI for tax years beginning after December 31, 2024. The exam will test the 30% limit, the EBITDA add-backs, and the §448(c) small business exemption.
Expect at least 2-3 questions on §163(j).
The 30% Limitation Formula
| Element | Description |
|---|---|
| Deductible interest | Business interest income + 30% of ATI + floor plan financing interest |
| ATI | Adjusted Taxable Income (now EBITDA-basis under OBBBA) |
| Excess | Disallowed; carried forward indefinitely (no carryback) |
Adjusted Taxable Income (ATI) — EBITDA Basis (2025+)
OBBBA made the EBITDA-basis ATI permanent starting in 2025. Depreciation, amortization, and depletion are added back — dramatically expanding ATI for capital-intensive businesses.
| Computation | Treatment |
|---|---|
| Start with taxable income (before §163(j) limit) | — |
| + Business interest expense | Add back |
| − Business interest income | Subtract |
| + Depreciation (incl. bonus, §179) | Add back (EBITDA) |
| + Amortization | Add back (EBITDA) |
| + Depletion | Add back (EBITDA) |
| +/− NOL deduction | Add back NOL (excluded from ATI) |
| +/− QBI deduction | Add back §199A |
| = ATI | Apply 30% × ATI cap |
Why this matters: From 2022–2024 ATI was on an EBIT basis (no D&A add-back), which crushed deductible interest for manufacturers, real estate operators, and other capital-heavy industries. OBBBA reverted to EBITDA retroactively for years beginning after Dec. 31, 2024, and made it permanent.
Small Business Exemption — §448(c)
| Tax Year | Average Gross Receipts Threshold |
|---|---|
| 2023 | $29 million |
| 2024 | $30 million |
| Tax Year 2025 | $31 million |
Test: Average annual gross receipts for the prior 3 tax years must be ≤ $31 million (2025). Tax shelters (regardless of size) cannot use the exemption. Aggregation rules under §52(a)/(b) and §414(m)/(o) apply for related entities.
Exempt or Elect-Out Businesses
| Type | Requirement |
|---|---|
| Small business (§448(c)) | Average gross receipts ≤ $31M (2025) |
| Real property trade/business | Elective; must use ADS depreciation (40-yr non-res, 30-yr residential, 20-yr QIP) |
| Farming business | Elective; must use ADS for 10+ year property |
| Certain regulated utilities | Automatic carve-out |
| Floor plan financing | Interest is fully deductible (outside the 30% cap) |
Carryforward Rules
| Rule | Description |
|---|---|
| Disallowed interest | Carried forward indefinitely |
| Carryback | Not allowed |
| Use in later year | When ATI capacity allows (subject to that year's 30% test) |
| Partnerships | Excess Business Interest Expense (EBIE) allocated to partners; deductible against partner-level excess taxable income |
§163(j) Calculation Example (Tax Year 2025, EBITDA-basis ATI)
| Item | Amount |
|---|---|
| Taxable income (before interest) | $10,000,000 |
| + Depreciation & amortization (EBITDA add-back) | $5,000,000 |
| ATI (EBITDA) | $15,000,000 |
| × 30% | $4,500,000 |
| + Business interest income | $0 |
| + Floor plan financing interest | $0 |
| Total interest deduction cap | $4,500,000 |
| Business interest expense | $6,000,000 |
| Deductible interest | $4,500,000 |
| Disallowed (carried forward indefinitely) | $1,500,000 |
Pre-OBBBA contrast (2022–2024 EBIT basis): ATI would have been only $10,000,000; the cap would have been $3,000,000; and $3,000,000 of interest would have been disallowed. OBBBA's EBITDA restoration cut the disallowance from $3M to $1.5M in this example.
Elect-Out Trade-Off (Real Property / Farming)
| Election | Consequence |
|---|---|
| Real property trade/business elects out | Full interest deduction (no 30% cap) |
| BUT must use ADS (longer recovery lives) | |
| Loses bonus depreciation on real property (incl. QIP) | |
| Election is irrevocable |
Real-World Scenario (Tax Year 2025)
Scenario: Manufacturer with $100M gross receipts in 2025. Taxable income $10M (before interest), depreciation $5M, business interest expense $6M, no interest income, no floor plan.
- §448(c) test: $100M > $31M → small business exemption unavailable. §163(j) applies.
- ATI (EBITDA, OBBBA): $10M + $5M = $15M.
- 30% × ATI cap: $15M × 30% = $4.5M.
- Deductible interest 2025: $4.5M.
- Carryforward: $1.5M (used in future years when ATI allows).
On the Exam
Expect 2-3 questions on §163(j), typically:
- Threshold Questions: "What is the 2025 §448(c) small business exemption?" → $31 million.
- ATI Questions: "Under OBBBA, what is added back to compute ATI in 2025?" → Depreciation, amortization, depletion (EBITDA basis, permanent under OBBBA).
- Elect-Out Questions: "What is the consequence of a real property trade or business electing out of §163(j)?" → Must use ADS depreciation; loses bonus on real property; election irrevocable.
The key is to remember: 30% of ATI; ATI is EBITDA-basis permanently under OBBBA (2025+); $31M small business exemption (2025); disallowed interest carries forward indefinitely; elect out = ADS forever.
Tax Year 2025 §448(c) small business exemption threshold for §163(j)?
Under OBBBA (effective 2025+), what is added back to compute ATI for §163(j)?
Real estate company elects out of §163(j). Consequence?