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From TCJA to OBBBA: Key Tax Updates Impacting Business Interest Expense Deductions On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law. This legislation makes several tax changes affecting businesses, including updates on business interest deduction limitations relating to Adjusted Taxable Income (ATI) calculation. This article will discuss the changes.
Joel Berenson Managing Director Cbiz Boston, MA 02109
The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, initially modified how business interest expense deductions were calculated. Under the TCJA, ATI was determined without considering deductions for depreciation, amortization, depletion or business interest expense (EBITDA). Starting in 2022, the calculation changed so that ATI included deductions for depreciation and amortization but continued to exclude business interest expense, aligning with EBIT. With the enactment of the OBBBA, for tax years beginning after December 31, 2024, ATI is now calculated based on EBITDA. Business interest expense deductions under IRC Section 163(j) for interest and other borrowing expenses incurred in trade or business are limited to the sum of the taxpayer’s business interest income, 30% of the taxpayer’s ATI and the taxpayer’s floor plan financing interest to acquire motor vehicles for sale or lease to retail customers for the tax year. For taxable years beginning after December 31, 2025, OBBBA requires capitalized interest to be treated as business interest subject to the 163(j) limitation, unless it was required to be capitalized under sections 263(g) or 263A(f) of the Internal Revenue Code (IRC).
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(for 2024, indexed for inflation) over the prior three years remain exempt from the limitation. Real Property and Farming Businesses. These entities may elect out of Section 163(j), provided they use the alternative depreciation system (ADS) for relevant property. Public Utilities and Certain Other Businesses. These industries remain excluded from the Section 163(j) limitation.
The revision to the definition of ATI means that businesses — especially those investing in equipment, property and other depreciable assets — will likely see increased interest expense deductions starting in 2025. As a result, tax planning strategies may shift as companies optimize their financing structures and capital investments to leverage the expanded cap. Different business entities like partnerships and LLCs, S corporations and C corporations are required to treat the limitation of business interest expense differently. All entities determine the business interest expense at the entity level. For a partnership or LLC, if any interest expense is disallowed, the entity doesn’t carry it forward to future tax years. Instead, the disallowed interest is classified as excess business interest and allocated to each partner on their Schedule K-1. For S corporations, any disallowed business interest expense is carried forward and treated as interest expense paid or accrued in subsequent years. Deductible business interest expense is then allocated to each shareholder on their Schedule K-1. For C corporations, any disallowed business interest expense is c a r r i ed f o r w a rd by the C corporation and considered as interest expense paid or accrued in the following year. Deductible business interest expense remains an expense of the corporation.
Under the OBBBA scenario, the taxpayer would receive the full benefit of the interest expense deduction. By contrast, the previous law limited the deduction to $270,000. While the limitation applies broadly, OBBBA preserves and updates certain exemptions: •
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Small Business Exception. Businesses with average annual gross receipts under $30 million
The OBBBA represents a significant shift in the treatment of business interest expense for U.S. taxpayers. The legislation is poised to benefit capital-intensive industries and encourage business investment by increasing the amount deductible through changes to the ATI calculation. However, as with any major tax reform, business entities should consult with tax professionals to understand the specific impacts on their operations and ensure compliance with evolving regulations.
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