The Internal Revenue Service has released updated frequently asked questions (FAQs) in Fact Sheet 2025-09, outlining significant changes to business interest expense deduction limits under the One, Big, Beautiful Bill (OBBB).
These updates clarify how businesses must calculate their interest deductions for the 2025 and 2026 tax years.
Key Changes for Tax Year 2025
Effective for tax years beginning after December 31, 2024:
-
ATI Calculation Adjustment: Taxpayers can now add back deductions for depreciation, amortization, and depletion when calculating their Adjusted Taxable Income (ATI). This generally increases the ATI, potentially allowing for a larger interest expense deduction.
-
Expanded “Floor Plan Financing”: The definition of a “motor vehicle” now includes trailers and campers designed for recreational or seasonal living (towed or affixed to a vehicle). This allows interest on the inventory of these units to be treated as floor plan financing interest.
Key Changes for Tax Year 2026
Effective for tax years beginning after December 31, 2025:
-
Capitalized Interest Clarification: Business interest expense now explicitly includes interest incurred and capitalized during the year. However, interest capitalized under Sections 263(g) (straddles) and 263A(f) (uniform capitalization rules) remains excluded.
-
Foreign Income Exclusion: When computing ATI, U.S. shareholders must now exclude income inclusion items from Controlled Foreign Corporations (CFCs) under Sections 951(a), 951A(a), and 78, along with any associated deductions.
Why This Matters
Section 163(j) limits the amount of business interest a taxpayer can deduct. By changing the components of Adjusted Taxable Income (ATI), the OBBB directly impacts the “ceiling” for these deductions.
Taxpayers should review these updated FAQs to ensure their 2025 and 2026 tax projections accurately reflect these technical shifts, particularly regarding international income and asset depreciation.