Businesses can generally deduct interest paid or accrued for federal tax purposes, but limits apply. Starting in 2025, changes under the One Big Beautiful Bill Act (OBBBA) will allow larger deductions for many taxpayers.
Understanding the Limitation
The deduction for business interest expense is typically capped at 30% of adjusted taxable income (ATI). This applies to individuals and entities such as partnerships, LLCs, and corporations. Any disallowed interest is carried forward to future years.
How It Works for Different Entities
- Partnerships, LLCs taxed as partnerships, and S corporations face the limitation first at the entity level, then at the owner level under complex rules.
- The limitation is applied before passive activity loss (PAL), at‑risk, and excess business loss rules, but after other provisions that defer or capitalize interest expense.
Key Changes Under OBBBA
Beginning in 2025, ATI will be calculated before deductions for depreciation, amortization, or depletion. This aligns ATI more closely with EBITDA, increasing allowable deductions.
Expanded Floor Plan Financing
The law also broadens the definition of floor plan financing to include loans for trailers and campers designed for recreational or seasonal use. This change further increases deductible interest for affected businesses.
Exceptions to the Limitation
Several businesses are exempt from the rules:
- Small businesses with average annual gross receipts below the inflation‑adjusted threshold ($31 million for 2025, $32 million for 2026).
- Electing real property businesses that agree to longer depreciation schedules.
- Electing farming businesses with similar depreciation trade‑offs.
- Utilities providing electricity, water, sewage, gas, or steam under regulated rates.
Trade‑Offs to Consider
Real property and farming businesses must weigh the benefit of deducting more interest now against slower depreciation deductions.
It’s Complicated
The rules are complex, and the changes may significantly affect your tax position. Consult a professional to evaluate the impact on your business.