Section 163(j) Explained: Business Interest Deduction Limits for 2026
Borrowing money can help a business grow—but it doesn’t always mean all interest is immediately deductible. Under IRC Section 163(j), the IRS limits how much business interest expense many businesses can deduct each year.
For 2026, understanding these rules is essential for businesses with loans, equipment financing, commercial mortgages, or other debt.
How the Deduction Limit Works
In general, your deductible business interest is limited to the total of:
- Business interest income
- 30% of Adjusted Taxable Income (ATI)
- Floor plan financing interest expense (if applicable)
If your interest expense exceeds the limit, the excess generally carries forward to future tax years.
What’s New for 2026?
1. Higher ATI May Increase Your Deduction
Beginning with 2026, depreciation, amortization, and depletion are once again added back when calculating Adjusted Taxable Income (ATI).
This generally increases ATI, which may allow businesses to deduct more interest than under prior rules.
2. Interest Limitation Applies Before Capitalization
Another significant change is that Section 163(j) now applies before most interest capitalization rules.
This means interest that would normally be capitalized generally enters the limitation calculation first, except for certain interest governed by Sections 263(g) and 263A(f).
Who May Be Exempt?
Some small businesses may not be subject to the Section 163(j) limitation if they meet the gross receipts test under IRC Section 448(c) and are not considered tax shelters.
Businesses should review the applicable inflation-adjusted threshold each year to determine eligibility.
Special Rules for Partnerships and S Corporations
Partnerships apply the limitation at the partnership level. Any disallowed interest becomes Excess Business Interest Expense (EBIE), which is allocated to partners and may be deductible in future years.
S corporations also calculate the limitation at the entity level, but unlike partnerships, any disallowed interest generally remains with the S corporation and carries forward.
Floor Plan Financing Exception
Businesses that finance vehicle inventory—such as auto dealerships—may benefit from special rules for floor plan financing interest, which is added to the allowable deduction calculation.
Key Takeaways
- ✔ Business interest deductions may be limited under IRC Section 163(j).
- ✔ The deduction is generally based on business interest income, 30% of ATI, and floor plan financing interest.
- ✔ Depreciation, amortization, and depletion once again increase ATI beginning in 2026.
- ✔ New ordering rules require Section 163(j) to be applied before most capitalization rules.
- ✔ Special rules apply to partnerships, S corporations, and certain small businesses.
Need Help Calculating Your Interest Deduction?
Section 163(j) calculations can be complex, especially for businesses with multiple loans, partnerships, or real estate investments. Our CPA team can help determine your allowable deduction, identify planning opportunities, and ensure your business stays compliant with the latest 2026 tax rules.
Contact us today to review your business interest deduction strategy.
