For tax years starting after 2024, there’s an important change to how your business calculates the interest expense deduction. Instead of relying on EBIT (earnings before interest and taxes), the new rule moves to EBITDA (earnings before interest, taxes, depreciation, and amortization) for adjusted taxable income under Section 163(j). This means businesses may be able to deduct more interest, which can be especially helpful for companies that invest in capital equipment or growth.
After 2025, certain amounts that would otherwise be included in a U.S. shareholder’s gross income from foreign corporations can be excluded from ATI. Plus, there’s an expanded definition of “motor vehicles” for floor plan financing—now including certain trailers and campers designed to be towed by or attached to a vehicle. When you figure out your Section 163(j) limit, be sure to calculate it before considering any requirements for capitalizing interest.
In short, these changes can offer more flexibility for your tax planning and make it a little easier for growing businesses to manage financing decisions.
Section 163(j) sets a cap on how much business interest expense you can deduct each year. Until now, that cap was based on EBIT (earnings before interest and taxes). OBBBA changes this starting in 2025, allowing businesses to calculate their deduction limit using EBITDA (earnings before interest, taxes, depreciation, and amortization) instead. Since EBITDA is a broader measure, most businesses will see their allowable deductions go up—good news for anyone with lots of capital investment or growth ahead!
This update is especially helpful for:
• Capital-heavy industries like manufacturing, energy, and real estate
• Businesses with big depreciation or amortization expenses
• Companies planning expansions or looking to restructure debt
With these changes, you have a little more room to plan, invest, and grow your business confidently.
For tax years beginning after 2024, ATI will be based on EBITDA rather than EBIT. This change is significant because EBITDA includes depreciation and amortization, resulting in a higher adjusted taxable income for most businesses. As a result, the 30% business interest deduction limitation will be calculated on a larger base, meaning companies—especially those with substantial non-cash expenses—can deduct more interest than before. This is particularly advantageous for capital-intensive industries, such as manufacturing, transportation, energy, and real estate, where depreciation and amortization play a major role in financial statements.
Starting in 2026, another important update is that ATI will exclude certain foreign income amounts that would otherwise have to be recognized by U.S. shareholders of foreign corporations. This exclusion can reduce a shareholder's ATI, potentially limiting their allowable interest deduction, so multinational businesses should take note and plan accordingly.
Additionally, the definition of “motor vehicles” for floor plan financing interest purposes is broadened; it now includes trailers and campers that are designed to be towed by, or affixed to, a motor vehicle. This means more businesses involved in RV or trailer sales can take advantage of the floor plan financing interest deduction.
Finally, the limit under Section 163(j) is to be calculated before applying any interest capitalization rules. This sequencing can impact how much interest is deductible in a given year and can simplify tax computations for businesses undertaking large capital projects. Overall, these provisions are designed to provide businesses with greater flexibility in managing interest expenses and to ensure the deduction rules better align with real-world business financing practices.
• Higher deductions for businesses with large depreciation schedules
• Improved cash flow for companies with significant interest expenses
• Strategic borrowing may become more attractive under the new rules
• Foreign income exclusions could reduce ATI and affect interest limits for multinational corporations