The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, restored the more favorable pre-2022 limit on business interest expense deductions. That’s good news for many businesses, particularly those in capital-intensive industries, which can now deduct more of their interest expense. But at the same time, the act introduced some less taxpayer-friendly changes to the interest expense provisions, which will have a negative impact on some companies. Here’s what you need to know.
TCJA-imposed limit
In 2017, the Tax Cuts and Jobs Act (TCJA) created Internal Revenue Code Section 163(j), which generally limits business interest deductions to 30% of a company’s adjusted taxable income (ATI). The limit doesn’t apply, however, to “small businesses,” defined as those whose average annual gross receipts for the preceding three tax years don’t exceed a specified threshold. In 2025, the limit is $31 million. To prevent larger companies from splitting themselves into small entities to qualify for the exemption, certain related businesses must aggregate their gross receipts for purposes of the threshold.
For a company whose gross receipts exceed the $31 million threshold, business interest deductions in a tax year are limited to the sum of:
- The company’s business interest income, if any,
- 30% of the company’s ATI, and
- The company’s floor plan financing interest, if any.
Business interest income and expense don’t include interest income or expense related to investments. Disallowed interest expense deductions may be carried forward indefinitely.
For companies that don’t earn business interest income or use floor plan financing, the limit is 30% of ATI. This is defined as taxable income, determined without regard to:
- Nonbusiness income, gain, deduction or loss,
- Business interest income or expense,
- Net operating loss deductions,
- The 20% qualified business income deduction for pass-through entities, or
- Depreciation, amortization or depletion (for tax years beginning before 2022).
Before 2022, ATI was roughly equal to earnings before interest, taxes, depreciation and amortization (EBITDA). Starting in 2022, depreciation, amortization and depletion were subtracted from income in determining ATI, making it closer to earnings before interest and taxes (EBIT). This change significantly reduced the deduction limit for capital-intensive businesses with large depreciable asset bases.
OBBBA changes
OBBBA restored the EBITDA-based calculation of ATI for tax years beginning after December 31, 2024. This enables companies to add back depreciation, amortization and depletion when calculating ATI, increasing their maximum interest deductions.
Suppose, for example, a company has $3 million in taxable income, $1,000,000 in depreciation deductions and $1.2 million in interest expense. Under the pre-OBBBA EBIT rules, the ATI was $3 million, allowing the business to deduct $900,000 (30% of ATI) in interest. Under the current EBITDA rules, however, depreciation would be added back to taxable income, resulting in ATI of $4 million and allowing the company to deduct its entire $1.2 million in interest expense.
Although this change increases interest deductions for many businesses, other changes made by the OBBBA, effective for tax years beginning after December 31, 2025, will have a negative impact on some companies. First, the act excludes certain foreign income from ATI, which may lower interest deductions for some businesses that operate internationally. Second, the act provides that capitalized interest remains subject to the Sec. 163(j) limitation, which thwarts a tax-planning strategy some companies used to alleviate the impact of the limitation. (See “New law closes the door on the capitalized interest strategy” below.)
The OBBBA does, however, preserve the ability of certain real property businesses (including developers, construction companies, rental companies and brokers) and farming businesses to opt out of the limit on business interest deductions. Companies eligible to opt out need to understand the tradeoffs, which include less favorable depreciation deductions for certain business assets, and weigh them against the benefits of unlimited interest deductions.
Specific circumstances
By restoring the EBITDA-based limit, the OBBBA boosts interest deductions for many companies. But, as mentioned, it also includes less favorable provisions that may reduce benefits for others. The law’s impact on your business’s tax-planning strategies depends on its asset mix, operations and other factors. So be sure to work with your CPA to carefully evaluate the new rules in light of your specific circumstances.
New law closes the door on the capitalized interest strategy
Under the tax code, businesses can elect to capitalize certain overhead costs, including interest, related to the acquisition or production of property. Before the One Big Beautiful Bill Act (OBBBA), many companies took advantage of this option to avoid the limit on interest deductions. By capitalizing interest, a company with excess interest deductions could deduct those amounts in other ways. For example, interest capitalized to equipment or other fixed assets could be recovered over time through depreciation deductions, and interest capitalized to inventory could be deducted as part of the cost of goods sold.
The OBBBA effectively shut down this strategy by extending the interest deduction limit to capitalized interest as well — with an exception for certain interest that’s required to be capitalized. Companies should take this change into account when weighing the potential benefits of capitalizing interest expense.
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