Section 163(j) Business Interest Deduction Limit for 2026

Debt can finance growth, acquisitions, equipment, and real estate, but the related interest is not always currently deductible. IRC Section 163(j) generally limits net business interest expense to business interest income plus 30% of adjusted taxable income, with a separate allowance for qualifying floor-plan financing interest.

The rule matters most for leveraged acquisitions, multi-entity groups, private equity portfolio companies, and real estate businesses that have not evaluated the real-property election. For 2026, the small-business gross-receipts threshold is $32 million, measured using a three-year average and aggregation rules.

The Core Calculation

The annual deduction generally cannot exceed business interest income, plus 30% of adjusted taxable income, plus floor-plan financing interest. Disallowed business interest carries forward, but the mechanics differ for C corporations, S corporations, and partnerships.

Adjusted taxable income is a tax concept, not EBITDA from the financial statements. The OBBBA restored the addback for depreciation, amortization, and depletion for tax years beginning after 2024, which can increase ATI and therefore increase the permitted deduction for capital-intensive businesses.

The Small-Business Exception

A business that meets the Section 448(c) gross-receipts test may be exempt, provided it is not a tax shelter under the statutory definition. Revenue Procedure 2025-32 sets the 2026 threshold at $32 million of average annual gross receipts for the prior three-tax-year period.

Commonly controlled entities generally must aggregate receipts. Splitting one enterprise among several LLCs does not create a separate $32 million limit for each entity. A business can also fail the exception because it is treated as a tax shelter even when receipts are below the dollar threshold, making ownership and loss allocations important.

Partnership and S-Corporation Differences

A partnership applies Section 163(j) at the entity level. Excess business interest expense is generally allocated to partners and may be deductible later only when that same partnership generates excess taxable income or excess business interest income. Buying into a new partnership does not free a carryforward from a different partnership.

An S corporation also calculates the limitation at the entity level, but disallowed interest generally remains at the corporate level rather than passing out as a shareholder-level carryforward. Owners of tiered entities should model where the limitation is created and where future capacity is expected to arise.

Real Property Trade or Business Election

An electing real property trade or business may be excluded from Section 163(j). The tradeoff is mandatory use of the alternative depreciation system for certain property, which can lengthen recovery periods and make affected property ineligible for bonus depreciation.

The election is generally irrevocable. It should be modeled over the projected hold period, considering interest deductions, depreciation, future refinancing, asset sales, and the specific classes of property affected. A current-year interest benefit can be outweighed by years of slower depreciation.

Planning Checklist

Confirm aggregated gross receipts before assuming the exception. Forecast ATI and interest for each entity. Identify existing carryforwards. Review acquisition debt allocation and intercompany loans. For real estate, compare the election against ADS depreciation. For pass-through entities, show owners how entity-level limits interact with basis, at-risk, passive-loss, and excess-business-loss rules.

Frequently Asked Questions

What is the 2026 gross-receipts threshold for Section 163(j)?

The inflation-adjusted Section 448(c) threshold is $32 million for 2026, generally based on average annual gross receipts for the preceding three tax years and subject to aggregation rules.

Does disallowed interest disappear?

No. It generally carries forward, but the location and release rules differ for corporations, S corporations, and partnerships.

Should every real estate business elect out?

No. The election can preserve interest deductions but requires ADS for affected property and can reduce depreciation benefits. It should be modeled before filing.

Section 163(j) Business Interest Deduction Limit: The 2026 Rules for Leveraged Businesses