This article first appeared on the CliftonLarsonAllen (CLA) Insights Blog. Used with permission.
Key insights
- Businesses can typically deduct business interest up to 30% of adjusted income, with exemptions for smaller businesses and special rules for real estate and farming entities.
- The new tax law allows businesses to add back depreciation, amortization, and depletion expenses when calculating income subject to the limitation, thereby increasing deductible interest for businesses with significant capital expenses.
- The new rules are not retroactive but may allow use of prior interest carryovers.
The new tax law known as the One Big Beautiful Bill Act greatly expands business interest deduction limits, which is a boon to capital-intensive businesses with significant interest expense — potentially reducing their federal corporate tax liability and enhancing financial flexibility.
Review some key provisions of the new policy to help identify potential opportunities for increasing your interest deductions.
What is the business interest limitation?
The business interest limitation, also known as the Section 163(j) limitation, restricts how much interest a business can deduct on its taxes.
You can generally deduct business interest up to 30% of your business income after certain adjustments. Businesses averaging less than $31 million in average gross receipts are generally exempt from the limit.
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Real estate and farming businesses can elect out of the limit but must use longer depreciation lives for some assets. Any interest you can’t deduct carries forward to future years.
The changed business interest rules: You can add back depreciation
Starting in 2025, businesses can add back depreciation, amortization, and depletion when calculating income for the 30% deduction limit. If your business has significant depreciation or amortization, this change may increase your deductible interest and lower your tax bill.
Example of how the new business interest rules could affect your organization
Auburn is a C corporation with the following items of income and expense during the year:
- Gross receipts: $1,000
- Cost of goods sold: ($850)
- Interest expense: ($100)
- Depreciation: ($50)
- Pre-limit taxable income: $0
Auburn’s business interest limit is computed as follows:
| Before | Now | |
|---|---|---|
| Pre-limit taxable income | $0 | $0 |
| Add back business interest | $100 | $100 |
| Add back depreciation, amortization, and depletion | N/A | $100 |
| Adjusted income | $100 | $200 |
| Limitation percentage | 30% | 30% |
| Business interest limitation | $30 | $60 |
| Taxable income after applying the limit | $70 | $40 |
| Federal corporate tax rate | 21% | 21% |
| Federal corporate tax | $14.70 | $8.40 |
The new business interest rules allow Auburn to deduct an additional $30 of interest.
Other expense limitation considerations
The new depreciation add back provides welcome relief, but it is not retroactive. However, by raising the interest cap, the change may give your business capacity to use interest carryovers from prior years.
Real estate and farming businesses that previously elected out of the limit can’t undo their choice under the new rules. They must continue to use longer depreciation lives even if the interest cap is no longer restrictive.
Some businesses adopted a strategy of capitalizing interest to inventory and other tangible assets to sidestep the interest limitation. Beginning in 2026, the new rules will end that strategy.
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CLA exists to create opportunities for clients, its people, and its communities through industry-focused wealth advisory, digital, audit, tax, consulting, and outsourcing services. With nearly 9,000 people, more than 130 locations, and a global vision, the firm and network promise to know and help its clients. CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.
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