One Big Beautiful Bill Meets Section 163(j): An Interest Limitation Makeover?
Published on by Michael O'Hara in International Business, Tax Services
What is Section 163(j)?
Originally introduced by the Tax Cuts and Jobs Act (TCJA) in 2017, Section 163(j) caps deductible business interest at 30% of a taxpayer’s Adjusted Taxable Income (ATI). Post-TCJA, ATI was calculated in a way that made the deduction more generous: earnings before interest, taxes, depreciation, and amortization (EBITDA) were used through 2021.
Starting in 2022, the calculation switched to EBIT, meaning no add-back for depreciation and amortization – tightening the screws on capital-intensive businesses. Excess interest not allowed as a deduction in the current year is carried forward indefinitely and treated as business interest expense paid or accrued in succeeding years.
With so much to unpack in the “One Big Beautiful Bill Act” (OBBBA), we’re covering the implications in a series of blog posts, which you can subscribe to receive here. Today, we’re looking at the implications of the OBBBA on interest limitations, but you may also be interested in our posts on the impact of the OBBBA on excess business losses, R&D expenditure relief, and qualified business income deductions.
Key changes to interest limitations under the OBBBA
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Return to pre-2022 ATI rules
Starting January 1, 2025, OBBBA permanently restores the EBITDA add-back for all future years—effectively increasing deductible interest capacity, potentially boosting it significantly for capital‑intensive businesses.
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Excluding international gross‑ups
OBBBA removes Subpart F, GILTI, and Section 78 gross-ups from ATI calculations. By excluding these, taxpayers with Controlled Foreign Corporations (CFCs) may have fewer items, increasing their income base—effectively reducing the cap on deductible interest expense.
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Interest capitalization ordering rule
Starting in 2026, OBBBA requires the 163(j) limitation to be applied before elective interest capitalization under Sections 263(a) or 263(g). This clause stops businesses from dodging the cap by shifting interest to assets.
Final thoughts
The OBBBA’s changes to Section 163(j) are expansive and far-reaching, reshaping the interest deductibility landscape – especially for companies investing in physical or intangible assets, or those operating globally.
If you’re evaluating leverage strategies or considering asset-heavy investments, now is the time to engage tax advisors and adjust your approach for 2025 and beyond. Contact us today for a free consultation with one of our leading tax pros. You can also read about what the OBBBA means for businesses and individuals here. As always, we’re here to help.
