Businesses carrying significant debt have more room to deduct interest under the current Section 163(j) rules, but the impact depends on how the business calculates adjusted taxable income, or ATI, and how its financing and entity structure interact with the limitation.
On August 19, 2026, the IRS issued updated Section 163(j) FAQs, replacing its December 2025 FAQs and incorporating changes made by the One, Big, Beautiful Bill Act.
For leveraged businesses, private-equity-backed companies, and companies carrying acquisition debt, the updated rules should be part of 2026 tax projections and financing models.
How the 30% ATI limitation works
Section 163(j) generally limits deductible business interest expense to the sum of:
- Business interest income;
- 30% of ATI; and
- Floor-plan financing interest expense
Businesses subject to the limitation generally use Form 8990 to calculate the current deduction and any interest carried forward.
The central planning variable is ATI. For tax years beginning after December 31, 2024, depreciation, amortization, and depletion deductions are once again added back when calculating ATI.
That produces a calculation that more closely resembles EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) rather than EBIT (Earnings Before Interest and Taxes). An asset-intensive business with substantial depreciation may therefore have meaningfully more ATI and a larger interest deduction than it would have under the rules that applied from 2022 through 2024.
For a company with acquisition debt or recent refinancing, that change can affect taxable income, estimated payments, covenant modeling, and the after-tax cost of borrowing.
The small-business threshold is $32 million for 2026
A business generally is not subject to Section 163(j) if it is not a tax shelter and satisfies the Section 448(c) gross-receipts test. For 2026, the inflation-adjusted threshold is $32 million in average annual gross receipts for the prior three years.
Growing companies near that threshold should monitor it before year-end rather than discovering the limitation during return preparation. Moving above the threshold can change the timing of interest deductions and may require a business to revisit tax projections, particularly when debt service is substantial.
Partnerships have an additional layer of complexity
For partnerships, Section 163(j) is applied at the partnership level. Interest that cannot be deducted may become excess business interest expense, or EBIE, allocated to the partners.
A partner generally carries EBIE forward until the same partnership later allocates sufficient excess taxable income or excess business interest income. That makes historical carryforward schedules relevant to current planning. A partnership whose ATI increases under the restored depreciation and amortization add-back may create additional capacity that affects both current interest and previously suspended amounts.
S corporations operate differently. Disallowed interest generally remains at the S corporation level rather than being allocated to shareholders.
Section 163(j) belongs in acquisition and financing models
Interest deductibility should be modeled before a transaction closes, not after debt has already been placed.
For acquisitions and refinancings, businesses should evaluate expected ATI, depreciation from acquired assets, existing interest carryforwards, entity structure, and the timing of projected earnings. Two financing structures with the same stated interest rate can produce very different after-tax cash costs if one generates deductible interest sooner.
International businesses have another 2026 change to consider. For tax years beginning after December 31, 2025, certain CFC income inclusions under Sections 951(a), 951A(a), and 78, along with associated deductions, are excluded from a U.S. shareholder’s ATI calculation. Companies with foreign subsidiaries should incorporate that change into their Section 163(j) forecasts rather than relying on prior modeling.
How Aura Advisors can help with Section 163(j)
The restored ATI add-back creates additional deduction capacity for many businesses, but it also changes the economics behind prior elections, debt structures, and transaction assumptions.
Businesses with material financing costs should review their 2026 ATI calculation, gross-receipts status, and suspended interest carryforwards. Companies considering an acquisition or refinancing should build Section 163(j) directly into the tax cash-flow model before financing terms are finalized.
Aura Advisors can help model current and future interest deductibility, review partnership and S corporation carryforwards,, and coordinate Section 163(j) with depreciation and transaction planning. The goal is a position that reflects the company’s actual financing profile and can be supported from modeling through the filed return.
For More Reading:
- How the One Big Beautiful Bill Act Reshapes Business Tax Strategy in 2025 and Beyond
- Advanced Flow-Through Entity Strategies for HNW Clients
- Estimated Income Taxes for Businesses – A Brief Overview
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.