Business Interest Expense in 2026: What You Can Deduct
Paying interest on a business loan is common—but deducting all of that interest isn’t always guaranteed.
For 2026, business interest expense is generally deductible under the Internal Revenue Code. However, many businesses must apply the deduction limitation under IRC Section 163(j), which may reduce the amount that can be claimed in the current year.
How Much Interest Can You Deduct?
For most businesses, the annual deduction is generally limited to:
- Business interest income
- + 30% of Adjusted Taxable Income (ATI)
- + Floor plan financing interest expense (if applicable)
If your business interest exceeds this amount, the unused portion generally carries forward to future tax years.
Major Changes for 2026
Higher ATI Can Increase Your Deduction
Beginning in 2026, depreciation, amortization, and depletion are once again added back when calculating Adjusted Taxable Income (ATI).
Because ATI is generally higher, many businesses may be able to deduct more interest expense than under prior rules.
Interest Limitation Applies Before Capitalization
Another significant change is that Section 163(j) now applies before most interest capitalization rules.
As a result, more interest expense may be included in the annual limitation calculation than in previous years.
Who May Qualify for an Exception?
Some businesses may not be subject to the Section 163(j) limitation.
Potential exceptions include:
- Small businesses meeting the gross receipts test
- Electing real property trades or businesses
- Electing farming businesses
- Certain regulated utility businesses
Keep in mind that electing out of Section 163(j) may require using the Alternative Depreciation System (ADS) and could affect bonus depreciation eligibility.
Special Rules for Partnerships and S Corporations
Partnerships apply the limitation at the partnership level. Disallowed interest generally becomes Excess Business Interest Expense (EBIE), which is allocated to partners.
S corporations also apply the limitation at the entity level, but any disallowed interest generally remains with the S corporation and carries forward.
Key Takeaways
- ✔ Business interest is generally deductible, but Section 163(j) may limit the deduction.
- ✔ 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 for 2026.
- ✔ New ordering rules may cause more interest expense to be subject to the limitation.
- ✔ Small businesses and certain industries may qualify for exceptions.
Need Help Maximizing Your Interest Deduction?
Section 163(j) can significantly affect financing decisions, real estate investments, and business cash flow. Our CPA team can help determine your allowable deduction, identify available exceptions, and develop tax-saving strategies for 2026.
Contact us today to review your business interest expense and maximize your tax deductions.
