The IRS has updated its guidance on the business interest expense deduction to reflect changes and clarifications made by the One Big Beautiful Bill Act (OBBBA). The revised FAQs address the section 163(j) rules following changes made by the 2017 Tax Cuts and Jobs Act and OBBBA and remove outdated CARES Act guidance.
Here’s what you need to know.
What is the business interest expense deduction?
Unlike most personal interest, business interest may be deductible. However, section 163(j) generally limits a taxpayer’s deduction for business interest expense to the total of business interest income, 30% of adjusted taxable income (ATI), and floor plan financing interest expense (interest on secured debt used to finance motor vehicles held for sale or lease).
Does it apply to everyone?
There are some exceptions, including for certain small businesses. A business generally qualifies for the small-business exemption if it is not a tax shelter and satisfies the section 448(c) gross receipts test. For 2026, the inflation-adjusted gross receipts threshold is $32 million, up from $31 million for 2025 and $30 million for 2024 (the test generally looks to average annual gross receipts for the preceding three years).
Certain businesses also fall outside the limitation, including the trade or business of performing services as an employee, certain regulated utilities, and qualifying real property and farming businesses that elect to be treated as excepted.
Wouldn’t I want to be excepted?
There’s a trade-off. An electing real property trade or business generally must depreciate nonresidential real property, residential rental property, and qualified improvement property using the alternative depreciation system, and those assets are not eligible for bonus depreciation. Similar rules apply to certain property held by an electing farming business.
What is ATI?
One of the most significant OBBBA changes concerns the calculation of adjusted taxable income (ATI).
For tax years beginning after December 31, 2024, depreciation, amortization, and depletion deductions are again added back to taxable income in calculating ATI. Those deductions could not be added back for tax years beginning after December 31, 2021, and before January 1, 2025.
For many taxpayers subject to the limitation, that can be a good thing. The change effectively restores an earnings before interest, taxes, depreciation, and amortization (EBITDA)-style calculation for purposes of the section 163(j) limitation and can increase the amount of business interest expense that taxpayers are permitted to deduct.
The updated FAQs explain that ATI begins with taxable income computed as though section 163(j) did not limit the interest deduction, followed by certain additions and subtractions. For tax years beginning after 2024, those additions include depreciation, amortization, and depletion deductions, as well as items such as business interest expense, the net operating loss deduction, and the section 199A qualified business income deduction.
What changes were made to floor plan financing?
OBBBA expanded the definition of a motor vehicle for purposes of floor plan financing. For tax years beginning after December 31, 2024, the definition includes trailers and campers designed to provide temporary living quarters for recreational, camping, or seasonal use and to be towed by or affixed to a motor vehicle.
What about capitalization rules?
Capitalization generally means treating a cost as part of an asset rather than deducting it right away (typically, taxpayers prefer a deduction today rather than tomorrow).
Under OBBBA, with exceptions for interest capitalized under sections 263(g) and 263A(f), section 163(j) applies to all business interest expense regardless of whether an amount otherwise would be deducted or capitalized under a mandatory or elective interest capitalization provision. That means that the business interest expense excludes interest capitalized under sections 263(g) and 263A(f), but includes other interest expense allocable to a non-excepted trade or business.
The IRS emphasized that this provision is a clarification rather than a change in its position.
What about controlled foreign corporations?
A controlled foreign corporation (CFC) is generally a foreign corporation more than 50% owned, by vote or value, by U.S. shareholders. For this purpose, a U.S. shareholder generally is a U.S. person that owns at least 10% of the corporation by vote or value.
Special tax rules apply to U.S. shareholders of CFCs, including rules that may require them to include certain foreign earnings in income even if those earnings have not been distributed.
Now, a separate OBBBA amendment takes effect for tax years beginning after December 31, 2025. Under that provision, a U.S. shareholder’s CFC income inclusion items under sections 951(a), 951A(a), and 78, including associated portions of deductions, are excluded when computing ATI. As a result, U.S. shareholders can no longer increase ATI by a portion of their CFC income inclusions. (The IRS said proposed regulations issued in September 2020 are no longer consistent with current law and cannot be relied upon for tax years beginning after December 31, 2025.)
What about prior elections?
OBBBA did not change the rules for electing to treat a qualifying real property or farming trade or business as an excepted trade or business. However, the updated FAQs point taxpayers to Revenue Procedure 2026-17 for transition guidance providing procedures under which certain taxpayers may withdraw them in light of changes under OBBBA.
The FAQs also note that an election generally is irrevocable and binding for succeeding tax
years, subject to specified exceptions, making the transition relief potentially significant for businesses reconsidering the tradeoff between the interest deduction limitation and depreciation rules.
So this is the final word, right?
Not exactly. Treasury and the IRS said they plan to issue additional guidance addressing OBBBA changes and clarifications.
And, as is always the case, FAQs posted on IRS.gov are informal guidance. Because these FAQs have not been published in the Internal Revenue Bulletin, the IRS says they will not be relied on or used to resolve a taxpayer’s case. If an FAQ turns out to be inconsistent with the law as applied to a taxpayer’s facts, the law controls.
The IRS notes that taxpayers who reasonably and in good faith rely on the FAQs may qualify for reasonable-cause penalty relief if that reliance results in an underpayment. But taxpayers should still be cautious about relying on FAQs alone. Penalty relief does not eliminate the underlying tax liability, and having to establish reasonable cause after the IRS challenges a position is considerably different from having authoritative guidance supporting the position in the first place.
Where can I find the guidance?
The guidance can be found in Fact Sheet 2026-14. The fact sheet replaces the FAQs published in December 2025.
Read the full article here
