Can Businesses Deduct Interest in 2026?
Yes—but there are limits. While business loan interest is generally tax deductible, many businesses must apply the IRS limitation under IRC Section 163(j), which can reduce the amount deductible in the current year.
For 2026, your deductible business interest generally cannot exceed:
- Business interest income
- + 30% of Adjusted Taxable Income (ATI)
- + Floor plan financing interest (if applicable)
What’s New for 2026?
Depreciation Is Back in ATI
One of the biggest taxpayer-friendly changes is that depreciation, amortization, and depletion are once again added back when calculating Adjusted Taxable Income (ATI).
A higher ATI often means businesses can deduct more interest expense than under previous rules.
Interest Limitation Comes First
Beginning in 2026, Section 163(j) is applied before most interest capitalization rules.
This means more interest expense is included in the limitation calculation, potentially affecting the amount deductible during the year.
Who May Qualify for an Exception?
The business interest limitation generally does not apply to certain small businesses that meet the gross receipts test under IRC Section 448(c), provided they are not considered tax shelters.
Special elections and exceptions may also be available for:
- Real property trades or businesses
- Farming businesses
- Certain regulated utility businesses
What If Your Interest Isn’t Fully Deductible?
If your business exceeds the annual limitation, the disallowed interest generally carries forward to future tax years.
Partnerships follow different rules, with disallowed interest passing through to partners as Excess Business Interest Expense (EBIE), while S corporations generally carry the disallowed amount at the entity level.
Key Takeaways
- ✔ Business interest is generally deductible, but Section 163(j) may limit the deduction.
- ✔ The deduction is generally limited to business interest income plus 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.
- ✔ Small businesses and certain industries may qualify for exceptions.
Plan Before Year-End
Financing decisions can have a major impact on your tax liability. Understanding how Section 163(j) applies before year-end may help maximize current deductions and improve cash flow.
Our CPA team can review your financing structure, calculate your allowable interest deduction, and identify tax-saving opportunities for 2026.
