The IRS said Aug. 19 that it has updated frequently asked questions about the limitation on the deduction for business interest expense.
The updated FAQs are available in fact sheet FS-2026-14 which revises FS-2025-09, issued last December.
Prior to the 2017 Tax Cuts and Jobs Act (TCJA), Section 163(j) of the Internal Revenue Code applied only to certain interest paid or accrued by corporations. However, the TCJA significantly changed the Section 163(j) limitation.
Under the TCJA, starting in 2018, the deduction for business interest will generally be limited to 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year. The limit doesn’t apply to businesses with average annual gross receipts of $25 million or less for the three preceding tax years. It also doesn’t apply to certain regulated utilities.
In addition, investment interest and interest on floor plans (debt incurred to finance a dealer’s purchase of motor vehicle inventory for sale or lease) are exempt from this limitation, according to information from top 100 accounting firm Kahn, Litwin, Renza & Co.
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On March 27, 2020, Section 163(j) was further amended by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Treasury Department and the IRS issued final regulations under Section 163(j) in Sept. 2020 and Jan. 2021.
Additionally, 2025’s One Big Beautiful Bill Act made changes and clarifications to Section 163(j). Those changes are highlighted in one section of the updated fact sheet. Of the 20 questions and answers, the final two pertain to how the Section 163(j) limitation was impacted by the OBBBA.
Here’s an excerpt from that part of the fact sheet:
Topic D: One, Big, Beautiful Bill Act changes and clarifications
NOTE: The use of the term “change” in this Topic D is intended to reference changes to the underlying statutory language and not to indicate any change in the operative effect of the applicable law. This Topic has been revised (from that appearing in FS 2025-09) to distinguish between substantive changes in law and clarifications of existing law.
Q1. What changes and clarifications were made under the One, Big, Beautiful Bill Act? (updated Aug. 19, 2026)
A1. Taxpayers should be aware of four changes and clarifications made by the One, Big, Beautiful Bill Act regarding section 163(j).
First, for tax years beginning after Dec. 31, 2024, the One, Big, Beautiful Bill Act amended section 163(j) to add back deductions for depreciation, amortization, or depletion to taxable income when calculating ATI. For taxable years beginning after Dec. 31, 2021, and before Jan. 1, 2025, these amounts were not allowed to be added back to taxable income in calculating ATI.
Second, for tax years beginning after Dec. 31, 2024, the One, Big, Beautiful Bill Act revised the definition of a motor vehicle, for purposes of determining whether interest is floor plan financing interest, so that it includes 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.
Third, the One, Big, Beautiful Bill Act clarified that, except for interest that is capitalized under sections 263(g) or 263A(f), section 163(j) applies to all business interest expense regardless if any portion would otherwise be deducted or capitalized under a mandatory or elective interest capitalization provision. Accordingly, business interest expense excludes any interest capitalized under section 263(g) or 263A(f) and includes all other business interest expense. These clarifications do not reflect a change in Treasury and IRS position.
Fourth, for tax years beginning after Dec. 31, 2025, the One, Big, Beautiful Bill Act amended section 163(j) to exclude a U.S. shareholder’s CFC income inclusion items under sections 951(a), 951A(a), and 78 (including associated portions of deductions) from the computation of ATI. As a result of this change, a U.S. shareholder will no longer be allowed to increase its ATI by a portion of CFC income inclusions. Accordingly, the proposed regulations under Treas. Reg. § 1.163(j)-7(j) that were issued in September 2020 are no longer consistent with current law and taxpayers can no longer rely on them for tax years beginning after Dec. 31, 2025.
The Department of Treasury and the IRS plan to issue guidance that addresses these changes and clarifications to section 163(j).
Q2. What effect do changes and clarifications made under the One, Big, Beautiful Bill Act have on elections to be an excepted trade or business? (updated Aug. 19, 2026)
A2. The One, Big, Beautiful Bill Act did not change or otherwise clarify the rules for making an election to be treated as an excepted trade or business under Treas. Reg. sections 1.163(j)-9 and 1.163(j) 1(b)(15)(iii). However, Revenue Procedure 2026-17 provides transition guidance for taxpayers who previously made these elections but now want to withdraw them in light of the One, Big, Beautiful Bill Act changes to sections 163(j)(8) and 168(k).
There are three other sections in the fact sheet: General Information, Excepted Trades or Businesses, and Determining the Section 163(j) Limitation Amount.
More information about reliance is available on IRS.gov.
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