IRS Updates Business Interest Deduction Guidance Following Recent Tax Law Changes

The Internal Revenue Service has updated its guidance on the federal business interest expense deduction following changes introduced by the One Big Beautiful Bill Act (OBBBA). The revised guidance addresses several aspects of the rules under Section 163(j), including adjusted taxable income, floor plan financing, capitalization rules and certain controlled foreign corporation inclusions.

The updated information also removes guidance related to the Coronavirus Aid, Relief, and Economic Security (CARES) Act that is no longer applicable.

For businesses that regularly incur interest expenses, understanding the revised rules can be important when estimating deductible expenses and preparing federal tax returns.

What Is the Business Interest Expense Deduction?

Business interest expense may generally be deductible for federal tax purposes, although Section 163(j) places limits on the amount that can be deducted.

In general, the deduction for business interest expense is limited to the taxpayer’s:

• Business interest income
• 30% of adjusted taxable income (ATI)
• Floor plan financing interest expense

Floor plan financing generally refers to interest on secured debt used to finance motor vehicles held for sale or lease.

Because the deduction is subject to specific calculations and limitations, businesses may need to review how their income, interest expenses and financing arrangements interact under the updated rules.

Which Businesses May Be Exempt?

Section 163(j) does not apply in the same way to every taxpayer. Certain small businesses may qualify for an exemption from the business interest limitation.

Generally, a business can qualify for the small-business exemption if it is not a tax shelter and satisfies the gross receipts test under Section 448(c).

The threshold is adjusted for inflation each year. For 2026, the applicable average annual gross receipts threshold is $32 million, compared with $31 million in 2025 and $30 million in 2024.

The test generally considers a business’s average annual gross receipts for the preceding three years.

Why the Updated IRS Guidance Matters

The revised FAQs provide additional information for businesses and tax professionals navigating changes to Section 163(j).

The updates are particularly relevant for businesses whose financing structures or taxable income calculations may have changed because of recent tax legislation. Reviewing the updated rules can help taxpayers better understand how much business interest may be deductible and whether an exception applies.

However, the rules can become complicated depending on a company’s structure, transactions and sources of income. Businesses with significant interest expenses may benefit from reviewing their calculations with a qualified tax professional.

Changes Affecting Adjusted Taxable Income

Adjusted taxable income is an important component of the Section 163(j) limitation because the deduction generally incorporates a percentage of ATI into the calculation.

Changes made by recent tax legislation can therefore affect the amount of business interest that a taxpayer may deduct.

Businesses should pay close attention to how the updated definition and calculation of ATI applies to their specific circumstances rather than relying on calculations prepared under older rules.

Floor Plan Financing Remains Relevant

Floor plan financing interest receives specific treatment under Section 163(j).

This type of financing is generally associated with secured debt used by businesses to purchase motor vehicles held for sale or lease. Businesses operating in industries that rely on vehicle inventory financing should therefore consider whether their interest expenses fall within the applicable rules.

Understanding the distinction between ordinary business interest and qualifying floor plan financing interest can be important when determining the deduction limitation.

Businesses Should Review Older Tax Guidance

The IRS update also removes outdated CARES Act guidance from its Section 163(j) FAQs.

This serves as a reminder that businesses should be cautious about relying on older tax articles, worksheets or internal calculations when preparing current-year returns. Tax rules can change as legislation is enacted and IRS guidance evolves.

Businesses that have continued using historical tax processes may want to review their current procedures to ensure that they reflect the latest requirements.

What Businesses Should Consider for 2026

Businesses subject to the Section 163(j) limitation may want to review several areas during the 2026 tax year, including:

• Total business interest expense
• Business interest income
• Adjusted taxable income
• Floor plan financing interest
• Average annual gross receipts
• Whether the business qualifies for an exemption
• Changes resulting from the OBBBA

Keeping accurate financial records can make it easier to determine how the updated rules affect the business interest deduction. Understanding how taxes can affect broader financial planning can also help businesses and individuals make more informed decisions about their finances.

Conclusion

The IRS’s updated Section 163(j) guidance provides additional clarity following changes made by the One Big Beautiful Bill Act. The revised FAQs address important areas such as adjusted taxable income, floor plan financing and the small-business exemption while removing outdated CARES Act information.

For 2026, the small-business gross receipts threshold is $32 million, making the exemption an important consideration for qualifying businesses. However, eligibility and deduction calculations depend on individual circumstances.

Businesses with significant interest expenses or complex financing arrangements should review the updated IRS guidance and consider professional tax advice to determine how the changes affect their federal tax position.

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