Section 163(j) is a federal tax rule that limits how much business interest expense a company can deduct each year. While the tax code generally allows businesses to deduct interest paid or accrued on debt, Section 163(j) limits the deduction for interest expense that is properly allocable to a trade or business. Business interest generally means interest expense paid or accrued on debt used in a trade or business
The rule is broad. It applies to many taxpayers, including corporations, partnerships, and foreign corporations in relevant cases. It is best understood as a timing rule: interest may be deductible later even if it is not deductible now. That is why many businesses refer to it as the business interest deduction limitation or an interest expense limitation.
The current-year deduction is generally limited to three buckets added together:
Adjusted taxable income (ATI) is not just ordinary taxable income. IRC §163(j)(8) starts with taxable income and then removes or adjusts certain items, including business interest expense and business interest income. For 2025, depreciation, amortization, and depletion are again added back in computing ATI, which usually increases the cap. That change applies for taxable years beginning after December 31, 2024.
The most common exemption is for a small business that meets the gross receipts test. IRC §163(j)(3) says the limitation does not apply to a taxpayer that meets the section 448(c) gross receipts test, unless it is a tax shelter. For 2025, the inflation-adjusted threshold is $31 million.
Other excepted trades or businesses include:
These exceptions matter because they can remove the deduction cap entirely for the affected activity. Businesses should also be aware of the Statute of Limitations for tax returns, although those filing deadlines are separate from the Section 163(j) interest limitation rules.
If interest is disallowed, it generally carries forward. IRC §163(j)(2) provides that disallowed business interest is treated as business interest paid or accrued in the succeeding taxable year.
For partnerships, the rules are more specialized. The limitation is applied at the partnership level, and disallowed interest becomes excess business interest allocated to partners. A partner can generally deduct that amount later only when the same partnership allocates excess taxable income or excess business interest income to that partner.
That future-year amount is often called a 163j carryforward in practice, although the partnership version has its own mechanics.
A real property trade or business may elect out of the limitation. The election is made under IRC §163(j)(7)(B) and the regulations require an election statement attached to a timely filed return. Once made, the election is generally irrevocable.
The tradeoff is important: the electing business must use Alternative Depreciation System for nonresidential real property, residential rental property, and qualified improvement property, and those assets are not eligible for bonus depreciation.
That means a 163j election can improve current interest deductions but slow cost recovery. Businesses also often review debt placement, entity structure, and capitalization methods. For tax years beginning after 2025, §163(j) generally applies before most capitalization provisions, except IRC §§263(g) and 263A(f). While Facilitative Costs are generally capitalized under separate rules, the ordering of these provisions can still affect overall transaction and capitalization planning.
Does Section 163(j) apply to interest paid on all types of debt?
No. It applies to business interest, meaning interest properly allocable to a trade or business, unless an exception applies. Personal interest is generally disallowed under separate rules, and excepted trades or businesses are outside Section 163(j).
Can a partnership and its partners each face separate 163(j) limitations on the same interest?
Yes, in a limited sense. The partnership applies Section 163(j) first. If interest is disallowed, partners receive excess business interest and may later deduct it only under partner-level rules when the partnership allocates sufficient excess taxable income.
How did the TCJA (Tax Cuts and Jobs Act) change the Section 163(j) rules from what existed before 2018?
Before 2018, Section 163(j) was narrower and mainly targeted certain corporate interest deductions. After TCJA, it became a broad limitation applying to many taxpayers, generally using business interest income plus 30% of adjusted taxable income.
Does Section 163(j) apply to foreign corporations operating in the United States?
Yes. It can apply to foreign corporations and other foreign persons engaged in a U.S. trade or business. Separate rules also apply to controlled foreign corporations, including CFC group rules and safe-harbor concepts in the regulations.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Zack Leder, partner in charge of Bennett Thrasher’s Business Tax Practice, or call us at 770.396.2200.
Never miss an update. Sign up to receive our monthly newsletter to unlock our experts' insights.
Subscribe Now