Businesses can generally deduct interest they pay or accrue, but federal tax rules limit how much can be claimed each year. Recent changes under the One Big Beautiful Bill Act (OBBBA) will allow many companies to take larger interest deductions starting in 2025.
Understanding the Limitation Rules
General 30% ATI Limitation
Business interest expense is typically capped at 30% of adjusted taxable income (ATI).
This limit can apply to:
- Individuals with business income
- Partnerships
- LLCs taxed as partnerships
- C corporations
- S corporations
Interest disallowed in the current year isn’t lost — it’s carried forward to future tax years.
What Counts as Business Interest
Business interest includes interest tied to business-related debt.
For partnerships, LLCs, and S corporations, the deduction limit is first calculated at the entity level, then again at the owner level, using a complex set of rules.
Interaction With Other Tax Limitations
The business interest limitation applies before:
- Passive activity loss (PAL) limitations
- At-risk rules
- Excess business loss limitations
However, it generally applies after other federal rules that defer, capitalize or disallow interest.
What’s Changing Under the OBBBA
ATI Moves to an EBITDA-Like Calculation (Starting 2025)
Beginning with taxable years after 2024, ATI will be calculated before depreciation, amortization and depletion.
This shifts ATI closer to EBITDA, which typically results in:
- Higher ATI
- A larger 30% cap
- More allowed business interest deductions
Expanded Definition of Floor Plan Financing
Also starting in 2025, floor plan financing now includes loans used to finance:
- Trailers
- Campers
- Units designed as temporary recreational or seasonal living spaces
- Units designed to be towed or attached to a motor vehicle
Businesses in these sectors may see significant increases in deductible interest expense.
Key Exceptions to the Limitation Rules
Some businesses are fully exempt from the interest deduction limitation.
Small Business Exception
If average annual gross receipts during the prior three years do not exceed the inflation-adjusted threshold, the limitation doesn’t apply.
- 2025 threshold: $31 million
- 2026 threshold: $32 million
Other Exempt Businesses
The deduction limit also does not apply to:
Electing Real Property Businesses
These businesses can elect out if they agree to use longer depreciation periods for certain real property assets.
Electing Farming Businesses
Similar to real property businesses, farming entities can elect out by agreeing to slower depreciation on certain farming property.
Public Utility-Type Businesses
Exemption applies to businesses that provide:
- Electricity
- Water
- Sewage disposal
- Gas or steam through a local distribution system
- Transportation of gas or steam by pipeline
Rates must be set by a qualifying regulatory authority.
Important Trade-Off
Electing out of the limitation may yield larger interest deductions now, but requires longer depreciation schedules, reducing deductions in future years. Businesses must weigh the short-term vs. long-term tax impact.
It’s Complicated — Let Us Help
The rules surrounding business interest expense deductions remain complex, especially with the new OBBBA updates. If your business may be affected, consult your tax advisor. We can help evaluate how the changes impact your deduction strategy.
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