Businesses that pay or accrue interest can generally deduct those expenses for federal tax purposes—but long-standing IRS limitations have often restricted how much interest a company can write off each year. With the introduction of the One Big Beautiful Bill Act (OBBBA), key changes are coming in 2025 that may allow many businesses to claim larger deductions and improve cash flow.
Understanding the Business Interest Expense Limitation
Under current law, the annual deduction for business interest expense is generally capped at 30% of the taxpayer’s adjusted taxable income (ATI). This rule applies to individuals with business income, partnerships, LLCs taxed as partnerships, S corporations, and C corporations. Any interest expense that exceeds the limitation is not lost—it is carried forward to future tax years.
The IRS defines business interest expense as interest paid or accrued on debt properly allocable to a trade or business. For partnerships, LLCs taxed as partnerships, and S corporations, the interest-deduction limitation is applied first at the entity level and then again at the individual owner level. These additional layers of review can make compliance particularly complex.
Importantly, this limitation applies before the passive activity loss (PAL) rules, at-risk rules, and excess business loss rules. However, the limitation is generally applied after tax rules that capitalize, defer, or disallow interest under other federal provisions.
What’s Changing Under the OBBBA?
The new OBBBA legislation significantly broadens what taxpayers can deduct by revising how ATI is calculated and expanding the definition of floor plan financing.
1. ATI Will Be Calculated Using an EBITDA Approach
For tax years beginning in 2025 and beyond, ATI must be computed before depreciation, amortization, and depletion. This aligns ATI more closely with the financial concept of EBITDA—earnings before interest, taxes, depreciation, and amortization.
By increasing ATI, the OBBBA effectively raises the 30% limitation amount, giving many businesses the ability to deduct more of their interest expense each year.
2. Expanded Definition of Floor Plan Financing
Also beginning in 2025, the OBBBA expands the definition of floor plan financing to include loans used to finance:
- Trailers designed for temporary living quarters
- Campers intended for recreational or seasonal use
- Units that can be towed by or attached to motor vehicles
Businesses in these industries may see a meaningful increase in deductible interest expenses as a result.
Exceptions to the Limitation Rules
Some businesses are already exempt from the business interest expense limitation based on size or industry. These exemptions will remain under the OBBBA.
Small Business Exemption
Businesses with average annual gross receipts below a certain threshold are exempt from the interest limitation rules. These thresholds are:
- $31 million for tax years beginning in 2025
- $32 million for tax years beginning in 2026
Other Exempt Business Types
- Electing real property businesses that agree to use longer depreciation periods
- Electing farming businesses that also agree to slower depreciation
- Businesses that provide certain public utility services, including electricity, water, gas, steam, and sewage disposal, when rates are set by a qualifying regulatory authority
Real property and farming businesses considering an election to opt out of the limitation must carefully weigh the benefits. While opting out may allow larger interest deductions now, it also requires using longer depreciation schedules—which delays write-offs for certain assets.
How These Changes May Affect Your Business
The revised rules under the OBBBA could provide substantial tax relief for many businesses, particularly capital-intensive industries and companies that rely heavily on financing. However, the interaction between ATI calculations, entity-level rules, owner-level rules, and other federal tax provisions makes the analysis far from straightforward.
Proper planning is key. Evaluating whether your business will benefit may require reviewing projections, entity structure, prior-year carryforwards, and depreciation elections.
Need Guidance? Botwinick & Company Can Help
The business interest expense rules—especially with the upcoming OBBBA changes—are complex and highly situation-specific. Our tax professionals at Botwinick & Company can help you understand how the new law affects your business, evaluate your options, and implement the most tax-efficient strategy.
Contact us today for expert tax planning and guidance tailored to your business.
