Business Interest Deduction Limits in 2026: What Businesses Need to Know
Businesses often rely on financing to fund operations, purchase equipment, acquire real estate, or support expansion. While business loan interest is generally deductible, the IRS limits the amount many businesses can deduct each year under IRC Section 163(j).
Several important changes take effect in 2026, making it even more important to understand how these rules affect your business.
For most businesses, the deductible amount generally equals:
- Business interest income
- + 30% of Adjusted Taxable Income (ATI)
- + Floor plan financing interest expense (if applicable)
What’s New for 2026?
1. Depreciation Is Added Back to ATI
Beginning in 2026, depreciation, amortization, and depletion are once again added back when calculating Adjusted Taxable Income (ATI).
Because ATI is generally higher under this calculation, many businesses may be able to deduct more business interest expense than they could under prior rules.
2. Interest Limitation Applies Before Capitalization
A significant law change now requires businesses to apply the Section 163(j) limitation before most interest capitalization rules.
As a result, interest that would otherwise be capitalized is generally included in the limitation calculation first, with limited exceptions for certain interest governed by IRC 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 rules for partnerships.
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) and are not considered tax shelters.
Businesses should review the applicable inflation-adjusted gross receipts threshold each year to determine whether they qualify for this exception.
Special Rules for Partnerships
For partnerships, the business interest limitation is applied at the partnership level rather than separately by each partner.
Disallowed interest generally becomes Excess Business Interest Expense (EBIE), which is allocated to partners and may become deductible in future years when applicable IRS requirements are satisfied.
Electing Real Property and Farming Businesses
Certain real property trades or businesses and qualifying 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.
Businesses should carefully evaluate the long-term tax consequences before making the election.
Key Takeaways
✔ Business interest deductions are generally 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 beginning in 2026.
✔ The Section 163(j) limitation now applies before most interest capitalization rules.
✔ Many small businesses may qualify for an exception under the gross receipts test.
✔ Partnerships, real estate businesses, and farming operations are subject to specialized 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 determine whether your business qualifies for an exception, calculate your allowable deduction, and identify tax-saving opportunities before year-end.
Contact our CPA team today to review your business interest deduction strategy and maximize your available tax benefits for 2026.
Proactive tax planning can help your business improve cash flow while staying compliant with the latest IRS rules.
