Section 163(j) Business Interest Deduction: OBBBA 2026 Changes Explained
The One Big Beautiful Bill Act (OBBBA) permanently restores the EBITDA-based adjusted taxable income (ATI) calculation under Section 163(j) for all tax years beginning after December 31, 2024 — meaning most Inland Empire businesses can now deduct significantly more interest expense starting with their 2025 returns. Before this change, businesses had been stuck with the tighter EBIT formula since 2022, which excluded depreciation and amortization from the ATI cap. As of May 2026, this permanent fix is the most overlooked interest-deduction opportunity for California small businesses carrying equipment loans, lines of credit, or construction financing.
Written and reviewed by Adham Abadier, CPA — a California Board of Accountancy licensed Certified Public Accountant (License #158599) and founder of Catalyst CPA Corporation.
The Section 163(j) business interest deduction is one of the most consequential — and most misunderstood — provisions in the federal tax code for capital-intensive businesses. For Inland Empire companies carrying equipment loans, construction financing, or commercial real estate debt, understanding the OBBBA’s permanent EBITDA restoration is critical for 2025 tax planning and quarterly estimated payments. This guide explains exactly what changed, who it affects, and how to calculate your new deduction cap — with a real Fontana business example.
Key Takeaways
- ✅ OBBBA permanently restores the EBITDA-based ATI formula under IRC §163(j) for tax years beginning after 12/31/2024
- ✅ The §163(j) deduction cap is 30% of ATI (IRC §163(j)(1)) — and EBITDA-based ATI is consistently higher than EBIT-based ATI, unlocking more deductible interest
- ✅ Small businesses averaging $31 million or less in gross receipts (2025 threshold, per Rev. Proc. 2024-40) are fully exempt from §163(j) — check your eligibility first
- ✅ Businesses in construction, real estate, and manufacturing are the biggest winners due to heavy depreciation and amortization add-backs under EBITDA
- ✅ Disallowed interest carryforwards from prior years (2022–2024) can now be used against a larger 2025–2026 ATI cap
- ✅ Real estate businesses that made §163(j)(7) elections under TCJA should review Rev. Proc. 2026-17 for potential withdrawal options
- ✅ California does NOT conform to OBBBA for state income tax — your federal deduction may differ from your CA FTB deduction
What the OBBBA Changed — And Why It Matters Right Now
The EBIT vs. EBITDA Timeline
The Section 163(j) business interest deduction has always limited business interest deductions to the sum of: (1) business interest income, plus (2) 30% of adjusted taxable income (ATI), plus (3) floor plan financing interest. The fight has always been over how ATI is defined.
The 2017 Tax Cuts and Jobs Act (TCJA) allowed businesses to use EBITDA (earnings before interest, taxes, depreciation, and amortization) from 2018–2021 — which produced a higher ATI and a larger deduction cap. Then, starting January 1, 2022, the TCJA’s own sunset provision switched the formula to EBIT, stripping out depreciation and amortization. That change hammered capital-intensive businesses. According to Clark Nuber CPAs, a company with $1,000,000 of taxable income and $200,000 of depreciation lost $60,000 in deductible interest annually under EBIT vs. EBITDA — that’s a real tax increase of up to $21,000 per year at the flat corporate rate (IRC §11).
The OBBBA permanently restores EBITDA for all tax years beginning after December 31, 2024. For a calendar-year business, that means 2025 returns — filed in spring 2026 — are the first returns where the restored rule applies.
Who Is Subject to the Section 163(j) Business Interest Deduction Limit?
Not every business is affected. The IRS provides a small-business exemption: if your average annual gross receipts for the prior three tax years are $31 million or less (2025 indexed amount, per IRS Form 8990 and Rev. Proc. 2024-40), you are exempt from the limitation entirely. Most solo contractors, small manufacturers, and single-location retailers in Moreno Valley and the Inland Empire fall below this threshold and never file Form 8990.
However, if your business is growing — say, a Riverside-area construction company billing $8–$12 million annually, or an Ontario-based commercial real estate LLC carrying multiple properties — you may already be in §163(j) territory or approaching it. And if you are subject to the limit, the OBBBA change is immediate, real money. Our Riverside business tax services team regularly identifies clients crossing this threshold during annual tax planning reviews.
How the EBITDA Calculation Works — With a Real IE Example
The §163(j) Business Interest Deduction Formula Step-by-Step
- Start with taxable income for the year (before interest deductions)
- Add back: business interest expense, business interest income, depreciation & amortization, and net operating loss deductions
- The result is your ATI (EBITDA basis)
- Multiply ATI × 30% = your maximum deductible business interest expense
- Any interest expense above that cap is disallowed and carries forward to future years as excess business interest expense (EBIE)
Concrete Example: Fontana Equipment Fabricator
Consider a Fontana-based metal fabrication LLC (taxed as a partnership, filing Form 1065) with the following numbers for tax year 2025:
| Metric | EBIT Formula (2022–2024) | EBITDA Formula (2025+, OBBBA) |
|---|---|---|
| Taxable income (pre-interest) | $800,000 | $800,000 |
| Depreciation & amortization add-back | $0 (not allowed) | $250,000 |
| Adjusted Taxable Income (ATI) | $800,000 | $1,050,000 |
| 30% ATI cap | $240,000 | $315,000 |
| Total interest expense on equipment loans | $300,000 | $300,000 |
| Deductible interest | $240,000 | $300,000 (fully deductible) |
| Disallowed interest carryforward | $60,000 | $0 |
| Estimated federal tax savings (37% rate) | — | $22,200 more deducted |
Under the old EBIT formula, this Fontana LLC would have carried forward $60,000 in disallowed interest. Under OBBBA’s restored EBITDA formula, the full $300,000 is deductible in 2025 — saving the business approximately $22,200 in federal tax at the highest pass-through rate, plus freeing up cash flow for new equipment purchases or payroll.
Unlocking Prior-Year Disallowed Interest Carryforwards
Here’s the bonus that most business owners miss: any excess business interest expense (EBIE) that was disallowed in tax years 2022, 2023, and 2024 is still sitting on Form 8990 as a carryforward. Now that the EBITDA-based ATI cap is permanently higher, those carryforwards can be absorbed more quickly in 2025 and 2026 returns. For businesses that have been accumulating years of disallowed interest, this is a significant retroactive tax-planning opportunity — and it needs to be reflected in your 2025 quarterly estimated tax payments right now. Our tax planning services include a full Form 8990 carryforward review as part of every business engagement.
“Most of my clients in construction and real estate have been quietly accumulating disallowed interest carryforwards since 2022 and didn’t even know it. The OBBBA’s EBITDA restoration doesn’t just help going forward — it unlocks those carryforwards faster. If you haven’t reviewed your Form 8990 carryforward balance with your CPA, you’re leaving real money on the table heading into your 2025 return.”
Special Considerations for Real Estate and Construction Businesses
The §163(j)(7) Real Property Election — Should You Withdraw It?
When EBIT took over in 2022, many real estate businesses made an electing real property trade or business election under §163(j)(7). This election exempted them from the §163(j) cap entirely — but the tradeoff was losing bonus depreciation on qualified improvement property and other key assets.
Now that EBITDA is back and 100% bonus depreciation is also restored under OBBBA, that tradeoff looks different. IRS Rev. Proc. 2026-17 gives real estate and farming businesses a window to withdraw their prior §163(j)(7) elections made for tax years 2022–2024. Withdrawing may allow them to claim 100% bonus depreciation they previously gave up — a potentially large net benefit. This is an especially relevant question for Inland Empire commercial property owners, multi-family landlords, and ground-up developers along the I-215 corridor who made the election in 2022 or 2023.
Construction Companies Carrying Equipment Debt
The Inland Empire’s construction sector is one of the most active in Southern California, with billions in infrastructure and residential development underway in cities like Eastvale, Murrieta, and Ontario. A general contractor or subcontractor with $500,000 in annual equipment loan interest and $1.2 million in depreciation on cranes, excavators, and fleet vehicles will see a dramatically higher ATI cap under EBITDA. Accurate monthly bookkeeping that properly captures depreciation schedules and loan amortization is essential to maximizing this deduction on Form 8990.
California Conformity Warning: Federal §163(j) Business Interest Deduction ≠ State
FTB Does Not Follow OBBBA
California’s Franchise Tax Board (FTB) has not conformed to OBBBA for the 2025 tax year. Under California’s selective conformity rules (California Revenue and Taxation Code §17024.5), the state generally follows the Internal Revenue Code as of a specific date — and OBBBA provisions enacted in 2025 are not automatically incorporated. This means:
- Your federal Form 8990 will use the EBITDA-based ATI calculation for 2025
- Your California Schedule K-1 or FTB filing will likely still use the EBIT-based calculation
- You may owe California income tax on interest expense that is fully deductible at the federal level
This federal-state mismatch requires careful tracking on your books. Businesses filing Form 100S (S-Corp), Form 565 (Partnership), or Form 568 (LLC) with the FTB should expect a difference in deductible interest between their federal and California returns until the FTB issues formal conformity guidance. This issue often intersects with the California pass-through entity tax (CA PTET) — another area where federal and state treatment diverges for partnership and S-Corp filers.
Quarterly Estimated Tax Impact
If you are a pass-through entity owner (S-Corp shareholder or LLC/partnership partner) in California, the restored federal §163(j) business interest deduction flows through to your individual return on Schedule K-1. This may reduce your 2025 federal taxable income — and reduce your 2026 quarterly estimated tax payments (Form 1040-ES) due in April, June, September, and January. Your California estimated payments (FTB Form 540-ES) may not receive the same benefit. Review both sets of estimates now, before the September 15, 2026 quarterly deadline. Our business tax return services for 1065 and 1120-S filers include a full federal-California reconciliation for §163(j) differences.
Is Your Business Leaving §163(j) Deductions on the Table?
The OBBBA’s EBITDA restoration is real money — but only if your Form 8990 is filed correctly and your prior-year carryforwards are properly applied. Catalyst CPA Corporation serves construction, real estate, and manufacturing businesses across the Inland Empire. Call us today for a 2025 business tax review.
Frequently Asked Questions About the Section 163(j) Business Interest Deduction
What is the Section 163(j) business interest deduction limit?
Under IRC §163(j), business interest expense is deductible up to the sum of: (1) your business interest income, plus (2) 30% of your adjusted taxable income (ATI), plus (3) any floor plan financing interest. The OBBBA permanently defines ATI using the EBITDA formula for tax years beginning after December 31, 2024 — resulting in a higher cap and more deductible interest for most businesses.
Who is exempt from the Section 163(j) limitation?
Businesses with average annual gross receipts of $31 million or less for the prior three tax years (2025 indexed threshold, per Rev. Proc. 2024-40) are exempt from §163(j) entirely and do not need to file Form 8990. Most small businesses in Moreno Valley, Riverside, and the broader Inland Empire fall under this threshold and are not affected by the deduction cap.
What changed under the OBBBA for the Section 163(j) business interest deduction?
The OBBBA permanently restored the EBITDA-based ATI calculation that expired after 2021. From 2022–2024, businesses were required to use EBIT (excluding depreciation and amortization), which lowered the ATI cap and restricted deductible interest. Starting with tax years beginning after December 31, 2024, depreciation and amortization are once again added back to ATI, raising the 30% cap and allowing more interest to be deducted.
Can I deduct disallowed interest from 2022 through 2024?
Yes — disallowed excess business interest expense (EBIE) from prior years carries forward indefinitely under IRC §163(j)(2). With a higher EBITDA-based ATI cap now in effect for 2025 and beyond, those prior-year carryforwards can be absorbed faster. Review your Form 8990 carryforward balance from your 2022–2024 returns and factor it into your 2025 tax planning.
Does the OBBBA Section 163(j) change apply to S-Corps and partnerships?
Yes. Section 163(j) applies at the entity level for C-Corporations and at the entity level for partnerships and S-Corps before the interest limitation is passed through to partners and shareholders on Schedule K-1. The EBITDA restoration applies to all of these entity types for tax years beginning after December 31, 2024. 1065 and 1120-S filers both benefit.
Should California real estate businesses withdraw their §163(j)(7) election?
Many should seriously evaluate it. Rev. Proc. 2026-17 allows businesses that made electing real property trade or business elections for 2022–2024 to withdraw those elections and claim 100% bonus depreciation they forfeited. Because OBBBA now makes the EBITDA-based ATI cap permanently favorable, the original trade-off (give up bonus depreciation to avoid §163(j)) no longer makes sense for most real estate businesses. Consult a CPA before withdrawing — amended returns and amended K-1s are required.
How do I report the Section 163(j) limitation on my tax return?
Use IRS Form 8990 (Limitation on Business Interest Expense Under Section 163(j)) to calculate the allowable deduction and any carryforward. The form has four sections: ATI calculation, business interest income, the limitation calculation, and carryforward tracking. Pass-through entities report each partner’s or shareholder’s share of excess EBIE on Schedule K-1.
Does California conform to the OBBBA Section 163(j) EBITDA change?
No. As of May 2026, California’s FTB has not conformed to OBBBA’s §163(j) EBITDA restoration. California uses its own selective conformity rules under California Revenue and Taxation Code §17024.5. Businesses will likely need to track separate federal and California interest deduction calculations until the FTB issues a formal conformity ruling or legislative update.
Ready to See How the OBBBA Section 163(j) Changes Affect Your 2025 Return?
Adham Abadier, CPA and the team at Catalyst CPA Corporation serve businesses across Moreno Valley, Riverside, Corona, Eastvale, Fontana, and throughout the Inland Empire. We prepare Form 8990, calculate your EBITDA-based ATI, and identify every available deduction — including prior-year carryforwards you may not know you have. Learn more about how we serve 1120-S and 1065 filers on our business tax returns page, or contact our team today to schedule your 2025 business tax review.
Last reviewed: May 29, 2026 by Adham Abadier, CPA (CA #158599).
Disclaimer: This article is provided for general informational and educational purposes only and does not constitute legal, tax, or accounting advice. Tax laws change frequently and the information above reflects the author’s understanding as of May 29, 2026. The One Big Beautiful Bill Act (OBBBA) provisions referenced herein are subject to IRS guidance, technical corrections, and California conformity decisions that may affect the analysis. Individual results will vary based on your specific facts and circumstances. Consult a licensed CPA or tax attorney before making tax decisions. Catalyst CPA Corporation is licensed by the California Board of Accountancy. No CPA-client relationship is formed by reading this article.
