OBBB Act: Business Interest Deduction Limitation

December 11, 2025

President Donald Trump signed the One Big Beautiful Bill Act (OBBBA) into law on July 4, 2025. The Act contains multiple tax reforms. In this article, we will explain one of those reforms – changes to the business interest deduction limitation under the Code Sec. 163(j).

Background and General Rule

In general, interest and other borrowing expenses are deductible from gross income in the year they are paid or accrued. However, the deduction for business interest is limited to the sum of the following:

• The taxpayer’s business interest income for the tax year,

• 30 percent of the taxpayer’s adjusted taxable income (ATI), and

• The taxpayer’s floor-plan financing interest* to acquire motor vehicles for sale or lease to retail customers for the tax year.

ATI is the taxpayer’s taxable income excluding:

• income, gain, deduction, or loss not allocable to a trade or business,

• business interest income or expense,

• net operating loss deductions under Code Sec. 172 (NOL), and

• Code Sec. 199A deductions**.

*Floor plan financing interest: This is interest on debt used to finance the acquisition of motor vehicles held for sale or lease, and the debt is secured by the inventory. The definition of motor vehicles includes self-propelled vehicles for transporting people or property on public streets, highways, or roads, boats, and farm machinery and equipment.

**Code Sec. 199A deductions: It was created by the TCJA (2017) and permits a deduction of up to 20% of qualified business income (QBI) from pass-through businesses.

In certain cases, a taxpayer’s ATI may include subpart F income and global intangible low-taxed income (GILTI) inclusions and associated gross-up amounts for deemed paid foreign tax credits, and amounts determined under Code Sec. 956 for investment of earnings in U.S. property.

Highlights under the OBBBA

1.ATI Base

Under the old rule, ATI included deductions for depreciation, amortization, and depletion. In other words, it was based on EBIT. Under the OBBBA, the ATI base is now EBITDA, because depreciation, amortization, and depletion are added back to taxable income when computing ATI. As a result, ATI is higher than before, which increases the limitation on deductible business interest. This change applies to tax years beginning after 2024 and is not retroactive.

2.Foreign Inclusion Items in ATI

Foreign inclusion applies to companies that have subsidiaries in foreign countries. For tax years beginning after 2025, subpart F income and net controlled foreign corporation (CFC) tested income are excluded from ATI. Any associated gross-up amounts for deemed paid foreign tax credits are also excluded from ATI. In addition, the portion of the participation exemption deduction for certain foreign-sourced dividends, as well as the foreign-derived intangible income (FDII) and GILTI deductions that relate to those inclusions, are excluded from ATI as well. In other words, income arising from CFCs and the related deductions are effectively carved out of the ATI calculation.

3.Floor-Plan Financing Interest

The definition of “motor vehicle” is expanded to include certain towable trailers and campers, so interest on floor-plan financing for those items is deductible.

4.Coordination with Interest Capitalization Provisions

Under the OBBBA, the application of the Section 163(j) business interest deduction limitation is organized as follows:

a. Aggregate business interest for the year.

     (i) Interest that is eligible to be capitalized; and

     (ii) Other ordinary business interest.

b. Calculate the business interest deduction limitation under Section 163(j).

c. Apply the limitation first to “(i) capitalizable interest.”

    Capitalizable interest is normally included in the asset’s cost basis and recovered through depreciation. However, for purposes of Section 163(j), it is first treated as business interest and tested against the limitation.

     If, at this point, the Section 163(j) limitation is less than the amount of capitalizable interest, the excess portion cannot be included in the asset’s cost. Instead, that excess is carried forward to subsequent years as non-capitalized business interest.

d. If any limitation remains, apply it next to “(ii) other ordinary business interest”.

 If the total of capitalizable interest and ordinary business interest exceeds the Section 163(j) limitation, the excess ordinary business interest is carried forward to future years. and attribution rules are narrowed. BEAT remains but with a 10.5% permanent rate and ongoing access to credits. FTC rules tighten for NCTI but provide new benefits for U.S. manufacturers with foreign sales. Finally, the deemed paid FTC increases from 80% to 90% at inclusion, but with no additional credit on later distributions.