The IRS updated Fact Sheet 2025-09 on 23 December 2025, clarifying changes to Section 163(j) business interest expense limits under the One, Big, Beautiful Bill. Updates cover Adjusted Taxable Income, floor plan financing interest, capitalised interest, and exclusions for US shareholders’ CFC income, effective for tax years beginning after 31 December 2024 and 31 December 2025.
The US Internal Revenue Service (IRS) updated the frequently asked questions in Fact Sheet 2025-09 on 23 December 2025, regarding changes to the limitation on the deduction for business interest expense (Section 163(j)) under the One, Big, Beautiful Bill.
For tax years beginning after 31 December 2024, OBBB amended Section 163(j) by:
- Allowing taxpayers to add back deductions for depreciation, amortisation, or depletion when calculating Adjusted Taxable Income.
- Expanding the definition of floor plan financing interest to treat, as a motor vehicle, any trailer or camper designed to provide temporary living quarters for recreational, camping or seasonal use and designed to be towed by, or affixed to, a motor vehicle.
For tax years beginning after 31 December 2025, OBBB amended Section 163(j) by:
- Clarifying that business interest expense subject to Section 163(j) includes any interest incurred and capitalised during the tax year, except for interest capitalised under Sections 263(g) and 263A(f).
Excluding a US shareholder’s controlled foreign corporation income inclusion items under Sections 951(a), 951A(a) and 78, and associated deductions, from the computation of Adjusted Taxable Income.
Fact Sheet 2025-09 includes the following updated and new FAQs:
Topic A: General
Q1. What is the section 163(j) limitation on the deduction for business interest expense? (updated 23 December 2025)
Generally, taxpayers can deduct interest expense paid or accrued in the taxable year. However, if the section 163(j) limitation applies, the amount of deductible business interest expense in a taxable year cannot exceed the sum of:
- The taxpayer’s business interest income for the taxable year;
- 30% of the taxpayer’s adjusted taxable income (ATI) for the taxable year; and
- The taxpayer’s floor plan financing interest expense for the taxable year.
Under the CARES Act, a different percentage (50%) of ATI may apply for taxable years beginning in 2019 and 2020. See the CARES Act, discussed later, and Revenue Procedure 2020-22, for ATI elections and special rules for partnerships.
Q3. What is the gross receipts test for purposes of the section 163(j) limitation? (updated 23 December 2025)
A business generally meets the gross receipts test of section 448(c) for a taxable year when it is not a tax shelter (as defined in section 448(d)(3)) and has average annual gross receipts of USD 25 million or less in the previous three years. The USD 25 million gross receipts amount is adjusted annually for inflation. The inflation adjusted gross receipts amount for 2024 is USD 30 million. The inflation adjusted gross receipts amount for 2025 is USD 31 million.
Q4. My average annual gross receipts for years 2021-2023 were more than USD 30 million, subjecting me to a section 163(j) interest expense limitation for the 2024 tax year. A portion of that interest expense was limited and carried forward to 2025. If my average annual gross receipts based on tax years 2022 through 2024 decrease to below USD 31 million, will I be subject to the section 163(j) limitation when I file for the 2025 taxable year? (updated 23 December 2025)
No. Although you were subject to the section 163(j) limitation for the 2024 taxable year, the limitation does not apply to you for the 2025 taxable year. The disallowed portion of business interest expense from 2024 that is carried forward to 2025, along with the amount of 2025 business interest, will not be subject to the limitation in 2025 because your average annual gross receipts for 2022-2024 are below USD 31 million. Therefore, you do not need to compute the section 163(j) limitation for the 2025 taxable year.
Topic C: Determining the Section 163(j) Limitation Amount
Q2. What is business interest expense? (updated 23 December 2025)
Business interest expense is any interest expense that is properly allocable to a trade or business that is not an excepted trade or business.
For tax years beginning after 31 December 2025, section 163(j) is applied before any mandatory or elective interest capitalisation provisions, except for sections 263(g) and 263A(f). Accordingly, business interest expense for these years excludes any interest capitalised under section 263(g) and 263A(f) and includes all other business interest expense.
Floor plan financing interest expense is also a business interest expense. See Topic C: Q 1, for what is considered interest. See Topic C: Q 8, if you have interest expense that is allocable to both an excepted trade or business and a non-excepted trade or business.
Q4. How do I calculate ATI (ATI limitation)? (updated 23 December 2025)
ATI is calculated by taking the taxable income for the taxable year as if section 163(j) did not limit any interest deduction, and then adding and subtracting from that amount certain amounts for the taxable year:
Additions include, but are not limited to, business interest expense; net operating loss deduction; deduction for qualified business income under section 199A; depreciation, amortization, or depletion deduction for taxable years beginning before 1 January 2022, and after 31 December 2024; capital loss carrybacks or carryovers; and any deduction or loss not properly allocable to a non-excepted trade or business.
Subtractions include, but are not limited to, business interest income; floor plan financing interest expense; with respect to the sale or other disposition of property (which may take place in a taxable year starting on or after 1 January 2022), the greater of the allowed or allowable depreciation, amortization or depletion of the property for taxable years beginning before 1 January 2022, and after 31 December 2024; and any income or gain that is not properly allocable to a non-excepted trade or business.
For taxable years beginning after 31 December 2021, and before 1 January 2025, deductions for depreciation, amortisation, or depletion are not added back to taxable income in calculating ATI.
Certain other adjustments to ATI apply for some types of taxpayers. See Treas. Reg. §1.163(j)-1(b)(1).
Q5. How Do I Make the Election to Substitute Adjusted Taxable Income for the Last Taxable Year in 2019? (updated 23 December 2025)
The CARES Act allows a taxpayer to elect to substitute its ATI for the last taxable year beginning in 2019 for the taxpayer’s ATI in determining the taxpayer’s section 163(j) limitation for any taxable year beginning in 2020, subject to modifications for short taxable years.
If this election is made, complete line 22, adjusted taxable income, on Form 8990 and leave lines 6 through 21 blank. No formal statement is required to make this election. Please see section 6.02 of Revenue Procedure 2020-22 for additional information regarding this election under section 163(j)(10), as enacted by the CARES Act.
Q6. What is floor plan financing interest expense? (updated 23 December 2025)
A6. Floor plan financing interest expense is interest paid or accrued on floor plan financing indebtedness. Floorplan financing indebtedness is indebtedness that is used to finance the acquisition of motor vehicles held for sale or lease and that is secured by the acquired inventory. For example, if you own an automobile dealership and pay interest on a loan that is secured by the dealership’s office equipment, then such interest is not a floorplan financing interest expense since it is not secured by the acquired inventory.
For purposes of floor plan financing, a motor vehicle is defined as any one of the following:
- A self-propelled vehicle designed for transporting persons or property on a public street,
- A boat, and
- Farm machinery or equipment
For tax years beginning after 31 December 2024, a motor vehicle also includes any trailer or camper which is designed to provide temporary living quarters for recreational, camping or seasonal use and is designed to be towed by, or affixed to, a motor vehicle.
Q7. What happens to business interest expense that I cannot deduct in the current year because of the section 163(j) limitation? (updated 23 December 2025)
The amount of business interest expense disallowed as a deduction in the current year under section 163(j) is carried forward to the next taxable year (a “disallowed business interest expense carryforward”). Your disallowed business interest expense carryforward may be limited in the next taxable year if the section 163(j) limitation continues to apply to you. Special rules apply to partnerships and S Corporations (see Topic C: Q 9). For taxable years beginning after 31 December 2025, no portion of any business interest carried forward from any taxable year to any succeeding taxable year is treated as interest to which an interest capitalisation provision applies. The term “interest capitalisation provision” means any provision under which interest is required to be charged to a capital account or may be deducted or charged to a capital account.
Topic E: One, Big, Beautiful Bill changes
Q1. What changes were made under the One, Big, Beautiful Bill for tax years beginning after 31 December 2024? (added 23 December 2025)
For tax years beginning after 31 December 2024, the One, Big, Beautiful Bill amended section 163(j) to add back deductions for depreciation, amortisation, or depletion to taxable income when calculating ATI. This change may benefit the taxpayer by increasing ATI, allowing for a higher limitation amount on the calculation of business interest. Previously, for tax years beginning after 31 December 2021, and before 1 January 2025, these amounts were not allowed to be added back to taxable income in calculating ATI. See Topic C: Q 4 for more details.
In addition, for tax years beginning after 31 December 2024, the One, Big, Beautiful Bill amended section 163(j) with respect to floor plan financing interest expense to include, as a motor vehicle, any trailer or camper which is designed to provide temporary living quarters for recreational, camping or seasonal use and is designed to be towed by, or affixed to, a motor vehicle. See
Topic C: Q 6 for more information.
Q2. What changes were made under the One, Big, Beautiful Bill for tax years beginning after 31 December 2025? (added 23 December 2025)
For tax years beginning after 31 December 2025, section 163(j) is applied before any mandatory or elective interest capitalisation provisions, except for sections 263(g) and 263A(f). Accordingly, business interest expense excludes any interest capitalised under section 263(g) and 263A(f) and includes all other business interest expense.” See Topic C: Q 2, 4 & 7 for more details.
Also, for tax years beginning after 31 December 2025, the One, Big, Beautiful Bill amended section 163(j) to exclude a U.S. shareholder’s CFC income inclusion items under sections 951(a), 951A(a) and 78 (including associated portions of deductions) from the computation of ATI. As a result of this change, a U.S. shareholder will no longer be allowed to increase its ATI by a portion of CFC income inclusions.
