Business Interest Limitation 2026: What OBBBA Changed for Section 163(j)
The business interest limitation 2026 workpaper is not last year's workpaper with new numbers dropped in. The One Big Beautiful Bill Act (OBBBA, Public Law 119-21, enacted July 4, 2025) amended Section 163(j) in three separate places, on two different effective dates. One of those amendments reverses a stricter rule that governed 2022, 2023, and 2024.
This reaches any client that carries real debt, and a few that were never capped before. Section 163(j) caps the deduction for business interest expense at business interest income, plus 30 percent of adjusted taxable income, plus floor plan financing interest. Clients under the $32,000,000 gross receipts test, tax shelters aside, are outside all of it. For everyone else the news splits: 2025 got easier, because depreciation goes back into the income the 30 percent applies to, worth $1,200,000 of extra interest capacity to a client running $4,000,000 of depreciation and positive adjusted taxable income. Then 2026 adds two ways to get caught that were not in last year's file. The 30 percent figure itself never changed.
What Makes the Business Interest Limitation 2026 Calculation Different?
Three OBBBA amendments on two effective dates. Section 70303 applies to taxable years beginning after December 31, 2024, so it is already in the 2025 return. Sections 70341 and 70342 wait for taxable years beginning after December 31, 2025, so a calendar-year 2026 return is the first to see them.
The moving part is ATI. ATI is adjusted taxable income, taxable income recomputed without regard to a list of items in Section 163(j)(8)(A), and Treas. Reg. 1.163(j)-2(b)(1) floors the 30 percent component at zero. That list of items is where OBBBA did its work.
Is the Client Exempt From the Limitation at All?
Test this before computing anything. Under Treas. Reg. 1.163(j)-2(d)(1), a taxpayer that meets the Section 448(c) gross receipts test, and is not a tax shelter as defined in Section 448(d)(3), is outside the limitation entirely.
The gross receipts test looks backward: it averages gross receipts over the three taxable years ending with the year before the one being tested. For taxable years beginning in 2026, Rev. Proc. 2025-32, section 4.30, sets that average at $32,000,000 or less; for 2025, Rev. Proc. 2024-40, section 2.31, set it at $31,000,000. (Both sit under a heading reading "Limitation on Use of Cash Method of Accounting," because the revenue procedures index the amount to Section 448. It is still the right figure for Section 163(j).)
That step is the ordinary inflation adjustment in those revenue procedures, not an OBBBA change.
The tax shelter carve-out is the trap. The Section 448(d)(3) definition can catch a partnership in a loss year without anyone intending it. Run it every loss year, not once at onboarding.
How Does ATI Compute Now That the Add-Back Is Back?
On an EBITDA basis. Section 70303(a) of OBBBA reads:
MODIFICATION OF LIMITATION ON BUSINESS INTEREST. (a) IN GENERAL.-Section 163(j)(8)(A)(v) is amended by striking "in the case of taxable years beginning before January 1, 2022,".
Clause (v) of Section 163(j)(8)(A) is the add-back for depreciation, amortization, and depletion. Before OBBBA the add-back stopped at taxable years beginning before January 1, 2022, which is why ATI went EBIT-based in 2022 and squeezed capital-intensive clients for three years.
Striking the limiter removes the year restriction, with no sunset. Section 70303(c)(1): "The amendments made by this section shall apply to taxable years beginning after December 31, 2024."
Where ATI is positive, every dollar added back raises the cap by thirty cents, which is the $1,200,000 in the opening example. Where ATI is negative the 30 percent component is zero under Section 163(j)(1), so the add-back buys nothing until it carries ATI back above zero.
Two documentation warnings. Treas. Reg. 1.163(j)-1(b)(1) still carries the pre-2022 limiter in its own text, because the regulation has not been updated for OBBBA; the statute controls, so a workpaper read against the regulation needs to cite Section 70303(a) directly. And 1.163(j)-1(b)(1)(ii)(C) still subtracts from ATI the depreciation, amortization, or depletion allowed or allowable for taxable years beginning after December 31, 2017 and before January 1, 2022 when that property is sold or otherwise disposed of. Section 70303 did not touch that subtraction, so it still bites on a 2025 or 2026 disposition.
Section 70303(b) also widens the motor vehicle definition at Section 163(j)(9)(C), so that term "shall also include any trailer or camper which is designed to provide temporary living quarters for recreational, camping, or seasonal use and is designed to be towed by, or affixed to, a motor vehicle." Since Section 163(j)(9)(B) defines floor plan financing indebtedness as debt used to acquire motor vehicles held for sale or lease and secured by that inventory, the qualifying indebtedness widens with the definition, and dealers financing campers and towable trailers gained an interest category outside the cap.
But Section 168(k)(9)(B) excludes from qualified property any property used in a trade or business that has had floor plan financing indebtedness, if the related interest was taken into account under Section 163(j)(1)(C). A dealer that starts counting camper and trailer floor plan interest can lose 100 percent bonus depreciation, so price both sides before treating the wider definition as a win.
If a real estate client elected out of Section 163(j) when the limitation bit harder, the arithmetic behind that election has moved on both sides. That branch runs through my post on undoing a real property trade or business election.
What Is Newly in Play for Taxable Years Beginning in 2026?
Two things, and neither one was in the 2025 return.
Section 70341 coordinates the limitation with interest capitalization. New Section 163(j)(10) provides that "the limitation under paragraph (1) shall apply to business interest without regard to whether the taxpayer would otherwise deduct such business interest or capitalize such business interest under an interest capitalization provision," and that any reference to a deduction for business interest includes capitalization.
Capitalizing interest into an asset no longer routes around the cap, but be careful which clients that reaches. The paragraph turns on an interest capitalization provision, defined at Section 163(j)(10)(D) as any provision under which interest "is required to be charged to capital account, or ... may be deducted or charged to capital account," the common example being a Section 266 election. Section 263A(f) interest is the opposite case: Section 70341(b) amended Section 163(j)(5) so that business interest "shall not include any interest which is capitalized under section 263(g) or 263A(f)," putting it outside the limitation, not inside.
For a client the paragraph does reach, Section 163(j)(10)(B) applies the allowed amount first to interest that would otherwise be capitalized and only the remainder to interest that would be deducted. Section 163(j)(10)(C) then stops disallowed interest carried forward from being treated as interest an interest capitalization provision applies to, so it no longer follows the asset. Section 70341(d) makes all of it effective for taxable years beginning after December 31, 2025.
Section 70342 changes the ATI definition itself, for international clients only. It amends Section 163(j)(8)(A) by adding a new clause (vi) covering "the amounts included in gross income under sections 951(a), 951A(a), and 78 (and the portion of the deductions allowed under sections 245A(a) (by reason of section 964(e)(4)) and 250(a)(1)(B) by reason of such inclusions)".
Read that against the opening words of Section 163(j)(8)(A): ATI is taxable income "computed without regard to" everything in the list, so the inclusions and the related portions of the Section 245A and Section 250 deductions are all excluded from the computation.
Clause (vi) strips 100 percent of the inclusions but restores only part of two deductions, and a Section 250(a)(1)(B) deduction is 40 percent of the inclusion it relates to. Ordinary subpart F inclusions under Section 951(a) have no offsetting deduction listed, since the only Section 245A(a) deduction named is the one arising by reason of Section 964(e)(4). So for a client with CFC inclusions this is a tighter cap, not a wash: ATI goes down or stays flat, never up. Only a Section 964(e)(4) inclusion fully offset by its Section 245A(a) deduction comes out near even. How far down depends on the client's mix, so compute the amount, not the direction. Section 70342(b) applies to taxable years beginning after December 31, 2025.
What Happens to Interest That Still Gets Disallowed?
It carries forward. Treas. Reg. 1.163(j)-5(b)(1) carries a C corporation's disallowed business interest expense into the succeeding taxable year as a carryforward. Partnerships and S corporations run on their own rules at Treas. Reg. 1.163(j)-6 and 1.163(j)-5(b)(2), so do not extend that result to a pass-through client without checking. Carryforwards built up in the squeezed 2022 to 2024 years are the balances most likely sitting unused, and a wider cap in 2025 and 2026 is what absorbs them.
Under Treas. Reg. 1.163(j)-2(c)(2), disallowed interest carried into a year in which the small business exemption applies is not limited that year, so a client that shrinks back under the gross receipts test can release a stranded carryforward.
FAQ
Did OBBBA change the 30 percent limitation? No. The cap formula is unchanged. OBBBA changed how ATI is computed, not the percentage.
Does the EBITDA add-back apply to the 2025 return or only to 2026? The 2025 return, under Section 70303(c)(1). Sections 70341 and 70342 are the two that wait for 2026.
Where to Start This Week
Sort the debt-heavy clients by whether they cleared the gross receipts test, then pull the disallowed interest carryforward balances off the 2022 through 2024 returns. Flag two smaller groups: clients capitalizing interest under a provision Section 70341 reaches, and clients with CFC inclusions, who meet Section 70342 the same year. Section 263A(f) interest is carved out, not caught. Neither group rolls forward from last year's file.
I built Tax Orator because a question like this one turns into an afternoon of reading amendment text against a regulation that has not caught up to it yet, and I wanted the citations on screen while I worked.