global Tax The OBBBA Boosts Interest Expense Deductions for Many Businesses July 22, 2025 The One Big Beautiful Bill Act (OBBBA) is loaded with tax provisions affecting businesses, many of which extend and expand provisions from the Tax Cuts and Jobs Act (TCJA). One such provision addresses the Section 163(j) business interest deduction. Here are the details and how the changes could affect your taxes, starting in 2025.History of the Business Interest DeductionBefore the TCJA went into effect, deductions for business interest generally were deductible without limitation. The TCJA enacted significant changes to business interest deductibility. The deduction generally was limited to 30% of a business’s adjusted taxable income (ATI), and any excess interest over the limit could be carried forward indefinitely. The CARES Act (2020) provided temporary relief and increased the limit from 30% to 50% of ATI for years 2019 and 2020 only.The TCJA also created an exception for so-called “small businesses.” For 2025, small businesses are those with average annual gross receipts of $31 million or less. In addition, real estate and farming businesses could elect out of the limit.Importantly, for 2018 through 2022, ATI was computed without regard to allowable deductions for depreciation, amortization or depletion; these items were added back when calculating ATI. Beginning in 2022, no add-back for these items was permitted, significantly reducing the deduction limit for some businesses. Essentially, ATI was generally calculated based on EBIT (earnings before interest and taxes) after 2021.New OBBBA ReliefUnder the OBBBA, beginning with the 2025 tax year, ATI for purposes of the business interest deduction is computed without accounting for deductions for depreciation, amortizations or depletion. In other words, ATI is calculated based on EBITDA (adding back depreciation, amortization and depletion), effectively increasing the interest deduction base.However, the new law also treats certain capitalized interest as business interest subject to the limit, beginning in 2026. Interest that is electively capitalized under Secs. 263(g) and 262A(f) will retain its character as business interest, and thus be included in the Section 163(j) limitation. Note that businesses that make a controlled foreign corporation election to increase their ATI through Subpart F income and global intangible low-tax income (GILTI) may need to find a new strategy, thanks to the OBBBA. The law excludes these items, Sec. 78 gross-up amounts and amounts determined under Sec. 956 from ATI, also beginning in 2026.Finally, the OBBBA modifies the floor plan financing component of the limit for applicable taxpayers. Previously, floor plan financing referred to interest paid or accrued on indebtedness used to finance the acquisition of “motor vehicles” held for sale or lease to retail customers and secured by the acquired vehicles. The new law expands the definition of “motor vehicles” to include certain trailers and campers designed to be towed by or affixed to a motor vehicle. Now the financing for such vehicles is deductible.Important: The OBBBA permanently changes the business interest deduction rules for tax years starting after December 31, 2024. However, the changes aren’t retroactive, and the EBIT limitation continues to apply for tax years beginning in 2022 through 2024.Are You Taking Full Advantage of the Favorable OBBBA Changes?The new law contains numerous other business-related tax provisions. Contact our global tax services team to see how the new law will affect your tax planning for 2025 and beyond.
