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.
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
Question types to practice on §163(j):
- 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)?
$27 million
$30 million
$31 million
$34 million
Under OBBBA (effective 2025+), what is added back to compute ATI for §163(j)?
Cost of goods sold only
§179 expense only
Depreciation, amortization, and depletion (EBITDA basis)
Only interest income
Real estate company elects out of §163(j). Consequence?
Election is reversible each year
Must use ADS depreciation (and loses bonus on real property); election is irrevocable
Loses §179 on vehicles
Cannot deduct meals
Sections you finish are checked off in the contents.