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How to Navigate the Business Interest Expense Deduction Limit in 2025

How to Navigate the Business Interest Expense Deduction Limit in 2025

Ken Botwinick, CPA | 03/10/2025

Understanding Section 163(j) and Strategic Tax Planning

Before the Tax Cuts and Jobs Act (TCJA), businesses could deduct most interest expenses related to their operations. However, with the introduction of Section 163(j), the IRS imposed new limitations on business interest expense deductions, significantly impacting companies with substantial financing costs.

As 2025 approaches, business owners must proactively manage these limitations to optimize their tax benefits. Fortunately, strategic tax planning can help mitigate the impact of these restrictions.

Breaking Down Section 163(j): How the Deduction Limit Works

Unless your company qualifies for an exemption, the maximum business interest deduction is limited to:

  • 30% of Adjusted Taxable Income (ATI)
  • Business interest income, if applicable
  • Floor plan financing interest, if applicable

If your business does not have significant business interest income or floor plan financing, the deduction limit generally equates to 30% of ATI.

What Counts as Adjusted Taxable Income (ATI)?

ATI represents taxable income, excluding:

  • Nonbusiness income, gains, deductions, or losses
  • Business interest income and expense
  • Net operating loss deductions
  • The 20% qualified business income (QBI) deduction for pass-through entities

Initially, ATI was calculated without factoring in depreciation, amortization, or depletion. However, as of 2022, these expenses are deducted, reducing ATI and thereby limiting deductible interest further.

How to Work Around the Business Interest Deduction Limit

While the Sec. 163(j) limitation remains in effect, businesses can implement strategies to manage its impact.

1. Determine If Your Business Qualifies for an Exemption

Certain small businesses are exempt from the deduction limit. Your business may qualify if its average annual gross receipts over the last three years fall below a specified threshold (adjusted annually for inflation). However, businesses classified as tax shelters do not qualify for this exemption.

Additionally, related businesses under common ownership must aggregate their gross receipts to prevent larger corporations from circumventing the limit by splitting into smaller entities.

2. Opt Out (If Eligible) – But Weigh the Costs

Certain real estate and farming businesses can opt out of the Sec. 163(j) limitation. Eligible real estate businesses include those engaged in:

  • Property development, redevelopment, and construction
  • Rental property operations and leasing
  • Real estate management and brokerage

However, opting out comes with a trade-off: businesses must switch to longer depreciation periods for certain property, reducing immediate tax benefits. Weighing the long-term tax savings of unlimited interest deductions against reduced depreciation deductions is crucial before making this election.

3. Capitalize Interest Expense to Reduce the Tax Impact

Interest that is capitalized is not subject to the Sec. 163(j) deduction limit. Businesses may capitalize interest costs related to acquiring or producing property as part of their asset’s cost basis.

  • Interest capitalized to equipment or fixed assets can be recovered over time via depreciation.
  • Interest capitalized to inventory can be deducted as part of the cost of goods sold (COGS), effectively reducing taxable income.

By leveraging capitalization strategies, businesses can shift their interest expense into a tax-deductible category that is not constrained by Sec. 163(j).

4. Reduce Interest Expenses Proactively

Reducing reliance on debt financing can minimize the impact of the interest deduction limit. Businesses can explore options such as:

  • Shifting to equity financing instead of debt
  • Paying down high-interest loans when possible
  • Generating interest income by extending credit terms to customers

By lowering overall interest expenses or increasing interest income, businesses can strategically navigate Sec. 163(j) limitations.

Stay Ahead with Proactive Tax Planning

Unlike other provisions of the TCJA set to expire in 2025, the business interest expense deduction limit remains in effect unless Congress intervenes. To safeguard your company’s financial health, planning ahead is essential.

If your business is affected by the Sec. 163(j) limitation, our tax experts can help you explore the best strategies to optimize your deductions. Contact us today to discuss how to minimize your tax burden and keep your business financially strong.

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Ken Botwinick, CPA Partner, CPA
Ken Botwinick, CPA is a Partner with Botwinick & Company, LLC and has been with the firm for more than 25 years. Ken specializes in providing accounting, tax, and business consulting services to dental and medical practices. He established the firm’s dental practice and is a sought-after lecturer at dental continuing education programs. Ken has his “finger on the pulse of the dental industry,” and with comprehensive experience in ownership transitions, he assists clients in the healthcare industry to reach their professional and financial aspirations and goals.
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About Ken Botwinick, CPA

Ken Botwinick, CPA is a Partner with Botwinick & Company, LLC and has been with the firm for more than 25 years. Ken specializes in providing accounting, tax, and business consulting services to dental and medical practices. He established the firm’s dental practice and is a sought-after lecturer at dental continuing education programs. Ken has his “finger on the pulse of the dental industry,” and with comprehensive experience in ownership transitions, he assists clients in the healthcare industry to reach their professional and financial aspirations and goals.

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