The One Big Beautiful Bill Breakdown: Interest Expense Limitation (Section 163(j))
The One Big Beautiful Bill (OBBB) made some significant changes to the interest expense limitation (Section 163(j)) that was created by the Tax Cuts and Jobs Act (TCJA) in 2017.
The Previous Tax Law
TCJA created 163(j), which was originally designed to limit interest deductions of highly leveraged businesses.
The original law applied to businesses with gross receipts in excess of $25 million or certain “tax shelters” (i.e., private equity owned businesses reporting taxable losses). If the rules of Section 163(j) applied to the business, interest expense was limited to 30% of taxable EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
Starting in 2022, interest expense was limited to 30% of taxable EBIT (Earnings Before Interest and Taxes). This change dramatically decreased the amount of deductible interest for many taxpayers subject to this provision.
Any interest not deducted in the current year is carried forward to future years. However, it became apparent that once a taxpayer had an interest limitation, it was very hard to use that carry-over in future years.
New and Final Law Under the One Big Beautiful Bill
OBBB made several changes to the interest expense limitation calculation.
One of the biggest changes takes effect for tax years starting after December 31, 2024, and is a change in the calculation to limit the interest deduction to 30% of taxable EBITDA. This change will allow more interest to be deducted.
There were also several changes in the calculation for tax years starting after December 31, 2025. The first is a change to the calculation of taxable EBITDA (also called Adjusted Taxable Income/ATI). The bill removes all foreign income items from ATI, which will lower the ATI amounts for taxpayers with foreign operations.
The second change is to the definition of interest included in the calculation. This change requires you to include all interest, even capitalized amounts, in the total interest amount when determining your interest limit. This takes away some planning opportunities that taxpayers could take to capitalize interest into manufactured goods to reduce interest subject to the limitation.
So, while the changes that take effect after December 31, 2025, could reduce the amount of deducted interest, overall, the changes to 163(j) are taxpayer friendly and can help increase the amount of interest deducted by taxpayers and reduce their overall tax liability.
What It Means for You and Your Business
If your business is subject to the rules of 163(j), these changes can make a significant difference to your interest deductibility. It is important to determine how large the impact could be to your business during 2025, as this could impact both your estimated tax payments and tax distributions to owners of pass-through entities.
To learn more about how the One Big Beautiful Bill and this specific provision may impact you, contact your Warren Averett advisor.
