Interest Deduction Limits Loosened, Restoring Favorable Treatment for U.S. Businesses

Businesses financing growth may see renewed opportunities to recover interest costs more quickly under the One Big Beautiful Bill Act (OBBBA) due to a change that restores depreciation and amortization addbacks in calculating the limit on deductible interest.

This adjustment to Internal Revenue Code Section 163(j) marks a return to the more generous standard in effect prior to 2022. While the change may appear technical, it holds real-world implications for capital-intensive industries, particularly those in construction, real estate development, and manufacturing, where access to capital and early-phase financing strategies often define project feasibility.

By allowing a higher calculation of adjusted taxable income (ATI), the revision expands the amount of interest companies may deduct in a given year. For businesses facing long development cycles or delayed revenue generation, the change may ease near-term cash flow constraints and improve the tax efficiency of borrowing.

The favorable Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)-based ATI calculation is now permanent for tax years beginning after December 31, 2024. The rules, however, remain complex. Key limitations remain in place, including the 30 percent ATI cap, and new ordering requirements eliminate some of the flexibility that had previously allowed businesses to shift timing of deductions. Businesses should model interest carryforwards carefully, as any disallowed interest expense can be carried forward indefinitely, affecting future tax and cash flow planning.

Additional guidance from the IRS is expected, and interpretation of the new rules may evolve as tax authorities and industry groups weigh in. Until then, thoughtful modeling and strategic financing remain essential to making the most of the available deduction.

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These insights were contributed by Tyler Champagne, CPA, MSA, Director. Questions? Reach out to our author directly or your AAFCPAs partner. AAFCPAs offers a wealth of resources on tax planning and compliance. Subscribe to get alerts and insights in your inbox.