Business Interest Deduction Limits in 2026: What Businesses Need to Know
Businesses that borrow money to finance operations, equipment, or expansion may not be able to deduct all of their interest expense immediately. The IRS limits business interest deductions under IRC Section 163(j), and several important changes take effect in 2026.
For most businesses, the deductible amount generally equals:
- Business interest income
- + 30% of Adjusted Taxable Income (ATI)
- + Floor plan financing interest
What’s New for 2026?
1. Depreciation Is Added Back to ATI
Beginning in 2026, ATI once again resembles an EBITDA-based calculation because depreciation, amortization, and depletion are added back when determining the limitation. For many businesses, this increases ATI and may allow a larger business interest deduction.
2. Interest Limitation Applies Before Capitalization
A major law change now requires businesses to apply the Section 163(j) limitation before most capitalization rules.
This means interest that would normally be capitalized is generally included in the limitation calculation first, with limited exceptions for certain hedging and production interest under Sections 263(g) and 263A(f).
How the Deduction Works
Businesses generally calculate their allowable deduction by:
- Determining total business interest expense
- Calculating Adjusted Taxable Income (ATI)
- Applying the 30% ATI limitation
- Adding any business interest income
- Adding eligible floor plan financing interest
Any business interest that cannot be deducted generally carries forward to future tax years, subject to special partnership rules.
Small Business Exception
Many smaller businesses may not be subject to the Section 163(j) limitation if they meet the gross receipts test under IRC Section 448(c), provided they are not considered tax shelters.
Businesses should review the applicable inflation-adjusted gross receipts threshold for the tax year when determining eligibility.
Special Rules for Partnerships
For partnerships, the limitation is applied at the partnership level rather than by each partner individually.
Disallowed interest generally becomes Excess Business Interest Expense (EBIE), which passes through to partners and may become deductible in future years when certain requirements are met.
Electing Real Property and Farming Businesses
Real property trades or businesses and certain farming businesses may elect out of the Section 163(j) limitation.
However, making this election generally requires using the Alternative Depreciation System (ADS) for certain assets and may affect eligibility for bonus depreciation.
Key Takeaways
- ✔ Business interest deductions remain limited to business interest income, 30% of ATI, and floor plan financing interest.
- ✔ Depreciation, amortization, and depletion are once again added back when calculating ATI.
- ✔ Interest limitation rules now apply before most capitalization rules.
- ✔ Small businesses may qualify for an exemption under the gross receipts test.
- ✔ Partnerships, real estate businesses, and farming operations have unique rules that require additional planning.
Need Help Maximizing Your Interest Deduction?
The Section 163(j) rules have become increasingly complex, especially with the 2026 changes. Our CPA team can help you determine whether your business qualifies for an exception, maximize deductible interest, and identify planning opportunities before year-end.
Contact us today to review your business interest deduction strategy for 2026.
