What are the business interest expense limitations for 2026?

For tax years beginning after December 31, 2024 — including 2026 — the limitation is based on 30% of adjusted taxable income (ATI) computed on an EBITDA basis, after the One Big Beautiful Bill Act restored the addback for depreciation, amortization and depletion

The Core §163(j) Limitation

Under IRC §163(j), the deduction for business interest expense is limited to the sum of:

• Business interest income for the year, plus
• 30% of adjusted taxable income (ATI), plus
• Floor plan financing interest (for auto dealers and similar businesses)

Any business interest expense that exceeds this limit is disallowed in the current year but may be carried forward indefinitely to future tax years as a disallowed business interest expense carryforward.

EBITDA vs. EBIT Shift

This is the most consequential aspect of §163(j) for capital-intensive businesses. From 2018–2021, ATI was calculated by adding back depreciation, depletion, and amortization (essentially EBITDA), making the limitation more generous. For tax years beginning in 2022 through 2024, the addback of depreciation and amortization was removed — ATI was calculated on an EBIT basis, which is lower, resulting in a smaller limitation and therefore less deductible interest.

For tax years beginning after December 31, 2024 — including 2026 — ATI is once again calculated on an EBITDA basis.

For businesses with significant depreciation or amortization (real estate, manufacturing, infrastructure, M&A-heavy companies), the loss of the D&A addback meaningfully increased their disallowed business interest expense in 2022 through 2024.

Which Entities Are Subject to §163(j)

The §163(j) limitation applies to most U.S. businesses regardless of entity type, including:

• C corporations (applied at the corporate level)
• Partnerships and LLCs taxed as partnerships (applied at the partner level for their allocable share)
• S corporations (applied at the corporate level)
• Sole proprietors with significant interest expense on Schedule C

Key Exemptions from §163(j)

Certain businesses are entirely exempt from the §163(j) limitation for 2026:

• Small businesses with average annual gross receipts of $31,000,000 or less (2025 threshold; indexed for inflation) for the prior three-year period — under the small business exemption of IRC §163(j)(3). 2026 Threshold: A business is generally exempt if its average annual gross receipts for the three prior years do not exceed $32 million 
• Electing real property trades or businesses under IRC §163(j)(7)(B) — commonly real estate developers, landlords, and real estate operators who make an irrevocable election; they are exempt from §163(j) but must use ADS depreciation for their real property
• Electing farming businesses under IRC §163(j)(7)(C) — with the same ADS depreciation trade-off
• Certain regulated utilities
• Floor plan financing interest for qualified dealers

Reporting

Corporations compute the §163(j) limitation on Form 8990 (Limitation on Business Interest Expense Under Section 163(j)). Partnerships and S-corps also complete Form 8990 at the entity level and report relevant amounts on Schedule K/K-1 for partners and shareholders to use on their own Form 8990.

Sources:

IRC §163(j) - Limitation on deduction for business interest

IRC §163(j)(3) - Small business exemption

IRC §163(j)(7) - Electing real property / farming business exemptions

IRS Form 8990 - Limitation on Business Interest Expense Under Section 163(j)

IRS Instructions for Form 8990

IRS Rev. Proc. 2024-40 - 2025 small business gross receipts threshold

IRS Publication 535 - Business Expenses