There has been new IRS guidance issued regarding the federal business interest expense deductions as a result of changes made to Section 163(j) of the code through OBBBA.
The latest guidance highlights some key elements under section 163(j), such as the concept of adjusted taxable income, financing under floor plans, capitalization provisions, and some controlled foreign corporation inclusions.
This update also eliminates the guidance provided for the CARES act which is no longer relevant at this point.
Businesses that are faced with interest expense on a regular basis may need to understand this updated guidance for estimating their deductible business expenses.
What Is the Business Interest Expense Deduction?
The cost of business interest expense is often deductible for income tax purposes except for the limitation on the amount to be deducted imposed by Section 163(j).
The general limitation for the deduction of business interest expense is as follows:
- Business interest income
- 30 percent of Adjusted Taxable Income
- Floor plan financing interest expense
The term “floor plan financing” usually involves interest paid on the secured debt that is used to finance motor vehicles intended for sale or lease.
Due to the fact that the tax break is calculated according to certain criteria, it may be necessary for companies to analyze the relationship between their income, interest and financing.
Which Businesses May Be Exempt?
Not all taxpayers will get the benefits of Section 163(j), and some taxpayers will be eligible for an exclusion from this business interest limitation. In general, the business would need to be a non-tax-shelter activity to meet the requirements for being exempt from this rule and to pass the gross receipts test under Section 448(c).
There is an updated standard gross receipts threshold for inflation every year. The standard gross receipts threshold for 2026 is $32 million. This amount is higher than that of 2025 ($31 million) and 2024 ($30 million).
Gross receipts threshold generally refers to the average annual gross receipts of the last three years.
Why the Updated IRS Guidance Matters
The new FAQs offer some guidance for businesses on the changes made to Section 163(j).
These are especially important for those that see themselves affected by the tax changes in the recently issued tax legislation. The review of the new requirements will help them understand how much of their business interest expense is deductible and whether there is an exception applicable to their situation.
However, the requirements may be rather confusing depending on the structure and types of transactions conducted by a particular business organization.
Changes Affecting Adjusted Taxable Income
Adjusted taxable income is an essential element of the Section 163(j) limit, since usually the computation of the deduction involves a percentage of the ATI.
The modifications introduced by the recently enacted tax law could have an impact on the amount of allowable business interest deductions.
Businesses need to be careful in applying the new definition and calculation of the ATI in their case, rather than using the old rules.
Floor Plan Financing Remains Relevant
The financing interest of floor plan financing is subject to special tax treatment as per section 163(j).
Financing of this nature is usually linked with the secured debt that businesses use to acquire motor vehicles intended for resale or leasing purposes. Businesses in industries where the financing of vehicle inventories is a common practice should thus be aware of how the interest expenses qualify.
The difference between ordinary business interest and floor plan financing interest may prove useful in calculating the limitation of deductions.
Businesses Should Review Older Tax Guidance
The IRS update further strips out dated CARES Act information from its Section 163(j) FAQs as well.
This should remind us that companies need to be wary of using old tax articles, worksheets, and calculations when preparing tax returns. Tax laws and regulations keep changing due to new legislation and guidance from the IRS.
Companies using the same old tax process may consider revising their procedures to keep up with the latest guidelines.
What Businesses Should Consider for 2026
Companies that face the restrictions of the Section 163(j) limit should consider evaluating some factors in the 2026 tax year, such as:
- Total interest expense
- Business interest income
- Adjusted taxable income
- Floor plan financing interest
- Average annual gross receipts
- If the company qualifies for an exception
- The impact of OBBBA on the company
Accurate financial recordkeeping may facilitate the process of understanding the impact of the new regulations on the business interest deduction. Knowing how taxes can affect overall financial planning is also important both for companies and individuals.
Conclusion
The new guidance from the IRS for Section 163(j) comes after changes brought about by the One Big Beautiful Bill Act. The new FAQs include topics like adjusted taxable income, floor plan financing, and small business exemptions while excluding old CARES Act information.
In 2026, the small business gross receipts threshold is $32 million, making the exemption relevant for qualifying businesses. However, whether one qualifies or not depends on their situation.
If your business has high interest expense or financing issues, then you might need to review the new IRS guidance for your federal taxes.
FAQs
The deduction is generally limited to business interest income, 30% of adjusted taxable income and eligible floor plan financing interest expense.
Certain small businesses can be exempt from the business interest limitation if they meet applicable requirements, including the Section 448(c) gross receipts test and the requirement that the business is not a tax shelter.
Yes. Businesses affected by Section 163(j) may want to review their calculations for 2026 to ensure they account for the latest tax rules, applicable exemptions and changes to adjusted taxable income.