Articles · Advanced · Business Deductions and Depreciation
Section 163(j): The Business Interest Limitation
Section 163(j) limits the deduction for business interest expense. Disallowed amounts carry forward, so it is mainly a timing rule, although it can be costly for leveraged businesses.
The formula
Deductible business interest generally equals business interest income, plus 30% of adjusted taxable income (ATI), plus floor plan financing interest. Legislation in 2025 restored an EBITDA-style ATI for tax years beginning after 2024, which adds back depreciation and amortization.
For example, with $20,000 of interest income and $500,000 of ATI, the limit is $170,000. If interest expense is $200,000, then $30,000 carries forward.
Exceptions
Small businesses that meet an inflation-adjusted gross receipts test are exempt, but tax shelters are not, and aggregation rules can combine related businesses. Certain real property and farming businesses can elect out, in exchange for slower depreciation on some assets. Regulated utilities and employee services are excepted.
Pass-through entities
The limit applies at the partnership level, and excess business interest expense is allocated to partners, who can deduct it only against later excess taxable income from that partnership. S corporations carry disallowed interest at the entity level.
Calculations are reported on Form 8990. Preparers should also check how state rules differ.
Key takeaways
- The core limit is interest income plus 30% of ATI.
- Check the small business exemption first.
- Partnerships and S corporations use different carryforward rules.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.