deduction

Prior to the enactment of the Tax Cuts and Jobs Act (TCJA), businesses were able to claim a tax deduction for most business-related interest expense. The TCJA created Section 163(j), which generally limits deductions of business interest, with certain exceptions.

If your business has significant interest expense, it’s important to understand the impact of the deduction limit on your tax bill. The good news is there may be ways to soften the tax bite in 2025.

The nuts and bolts

Unless your company is exempt from Sec. 163(j), your maximum business interest deduction for the tax year equals the sum of:

• 30% of your company’s adjusted taxable income (ATI),
• Your company’s business interest income, if any, and
• Your company’s floor plan financing interest, if any.

Assuming your company doesn’t have significant business interest income or floor plan financing interest expense, the deduction limitation is roughly equal to 30% of ATI.

Your company’s ATI is its taxable income, excluding:

• Nonbusiness income, gain, deduction or loss,
• Business interest income or expense,
• Net operating loss deductions, and
• The 20% qualified business income deduction for pass-through entities.

When Sec. 163(j) first became law, ATI was computed without regard to depreciation, amortization […]