Here’s what HIVE AI had to say about “What are the new rules for business interest expense deduction under Section 163(j) under the One Big Beautiful Bill?”:
New Rules for Business Interest Expense Deduction Under Section 163(j) in the One Big Beautiful Bill
The One Big Beautiful Bill Act (OBBBA) introduces several significant modifications to the business interest expense deduction rules under Section 163(j), fundamentally altering how businesses calculate their allowable interest deductions and coordinate with other tax provisions. These changes represent both technical refinements and substantive policy shifts that will impact business tax planning strategies.
Reversion to EBITDA-Based Adjusted Taxable Income Calculation
One of the most significant changes under the OBBBA involves the permanent modification of how Adjusted Taxable Income (ATI) is calculated for purposes of the Section 163(j) limitation. Section 163(j)(8)(A)(v) is amended by striking ” in the case of taxable years beginning before January 1, 2022, ” One Big Beautiful Bill Act: Sec. 70303. Modification of limitation on business interest , which effectively makes the EBITDA-based calculation permanent rather than temporary.
This change means that for taxable years beginning after December 31, 2024, the OBBBA changes the computation of Adjusted Taxable Income (ATI) for purposes of the Section 163(j) business interest deduction limitation. ATI will now be computed by reference to earnings before interest, taxes, depreciation, and amortization (EBITDA), rather than earnings before interest and taxes (EBIT). The practical effect is that this change generally allows for larger interest expense deductions, as depreciation and amortization are added back into the ATI calculation, which is particularly beneficial for capital-intensive industries.
Under the current framework, section 163(j)(1) now limits the taxpayer’s annual deduction for business interest expense to the sum of: (1) the taxpayer’s business interest income (as defined in section 163(j)(6)) for the taxable year; (2) 30 percent of the taxpayer’s adjusted taxable income (as defined in section 163(j)(8)) for the taxable year; and (3) the taxpayer’s floor plan financing interest (as defined in section 163(j)(9)) for the taxable year. The EBITDA-based calculation significantly expands the 30% ATI component of this limitation.
Enhanced Coordination with Interest Capitalization Provisions
The OBBBA introduces comprehensive new rules governing the coordination between Section 163(j) limitations and interest capitalization requirements. In applying this subsection— “(i) the limitation under paragraph (1) shall apply to business interest without regard to whether the taxpayer would otherwise deduct such business interest or capitalize such business interest under an interest capitalization provision, and “(ii) any reference in this subsection to a deduction for business interest shall be treated as including a reference to the capitalization of business interest. One Big Beautiful Bill Act: Sec. 70341. Coordination of business interest limitation with interest capitalization provisions
This coordination mechanism establishes a specific priority system for applying allowed interest amounts. The amount allowed after taking into account the limitation described in paragraph (1)— “(i) shall be applied first to the aggregate amount of business interest which would otherwise be capitalized, and “(ii) the remainder (if any) shall be applied to the aggregate amount of business interest which would be deducted. One Big Beautiful Bill Act: Sec. 70341. Coordination of business interest limitation with interest capitalization provisions This prioritization ensures that capitalized interest receives first consideration within the Section 163(j) limitation framework.
The new rules also address the treatment of disallowed interest carryforwards in relation to capitalization requirements. No portion of any business interest carried forward under paragraph (2) from any taxable year to any succeeding taxable year shall, for purposes of this title (including any interest capitalization provision which previously applied to such portion) be treated as interest to which an interest capitalization provision applies. One Big Beautiful Bill Act: Sec. 70341. Coordination of business interest limitation with interest capitalization provisions This provision prevents double limitations on carried-forward interest amounts.
Expanded Definition of Interest Capitalization Provisions
The OBBBA provides a comprehensive definition of what constitutes an interest capitalization provision for coordination purposes. For purposes of this section, the term ‘ interest capitalization provision ‘ means any provision of this subtitle under which interest— “(i) is required to be charged to capital account, or “(ii) may be deducted or charged to capital account. One Big Beautiful Bill Act: Sec. 70341. Coordination of business interest limitation with interest capitalization provisions This broad definition ensures that the coordination rules apply across various capitalization scenarios.
Additionally, the Act clarifies certain exclusions from the business interest definition. Such term shall not include any interest which is capitalized under section 263(g) or 263A(f). One Big Beautiful Bill Act: Sec. 70341. Coordination of business interest limitation with interest capitalization provisions This exclusion prevents specific types of capitalized interest from being subject to the Section 163(j) limitation framework.
Modifications to International Tax Components
The OBBBA introduces specific modifications to the ATI calculation for multinational corporations with international income inclusions. Subparagraph (A) of section 163(j)(8) is amended— (1) by striking ” and ” at the end of clause (iv), and (2) by adding at the end the following new clause: “(vi) the amounts included in gross income under sections 951(a), 951A(a), and 78 (and the portion of the deductions allowed under sections 245A(a) (by reason of section 964(e)(4)) and 250(a)(1)(B) by reason of such inclusions), and “. One Big Beautiful Bill Act: Sec. 70342. Definition of adjusted taxable income for business interest limitation
This modification ensures that various international tax inclusions and related deductions are properly accounted for in the ATI calculation, providing more accurate measurements of a taxpayer’s economic income for purposes of the interest limitation.
Expansion of Floor Plan Financing Provisions
The Act expands the definition of motor vehicles eligible for floor plan financing treatment. Such term shall also include any trailer or camper which is designed to provide temporary living quarters for recreational, camping, or seasonal use and is designed to be towed by, or affixed to, a motor vehicle. One Big Beautiful Bill Act: Sec. 70303. Modification of limitation on business interest This expansion provides additional relief for dealers in recreational vehicles by allowing their inventory financing interest to avoid the Section 163(j) limitation.
Enhanced Regulatory Authority
The OBBBA grants the Treasury Department expanded regulatory authority to implement the coordination provisions. The Secretary shall issue such regulations or guidance as may be necessary or appropriate to carry out the purposes of this subsection, including regulations or guidance to determine which business interest is taken into account under this subsection and section 59A(c)(3). One Big Beautiful Bill Act: Sec. 70341. Coordination of business interest limitation with interest capitalization provisions This authority is particularly important given the complexity of coordinating the business interest limitation with various capitalization requirements and international tax provisions.
Effective Dates and Implementation Timeline
The coordination provisions and international tax modifications have staggered effective dates. The amendments made by this section shall apply to taxable years beginning after December 31, 2025. One Big Beautiful Bill Act: Sec. 70341. Coordination of business interest limitation with interest capitalization provisions However, the amendments made by this section shall apply to taxable years beginning after December 31, 2024. One Big Beautiful Bill Act: Sec. 70303. Modification of limitation on business interest for the EBITDA modification and floor plan financing expansion.
Impact on Business Tax Planning
The reversion to EBITDA-based ATI calculation represents a significant benefit for capital-intensive businesses. The business interest expense deduction reverts back to a more favorable EBITDA-based interest deduction limitation which should be a beneficial change for most taxpayers. This change allows businesses to deduct depreciation and amortization from their taxable income while still adding these amounts back for purposes of calculating the 30% ATI limitation, effectively increasing the amount of business interest that can be deducted.
The coordination provisions with interest capitalization requirements provide much-needed clarity for businesses that must capitalize interest under various Code sections. By establishing clear priority rules and preventing double limitations on carried-forward amounts, these provisions should reduce compliance complexity and provide more predictable tax outcomes.
Interaction with Base Erosion and Anti-Abuse Tax
The enhanced regulatory authority specifically mentions coordination with Section 59A(c)(3), which relates to the Base Erosion and Anti-Abuse Tax (BEAT). This coordination is crucial for multinational corporations subject to both the Section 163(j) limitation and BEAT, as in the case of a taxpayer to which section 163(j) applies for the taxable year, the reduction in the amount of interest for which a deduction is allowed by reason of such subsection shall be treated as allocable first to interest paid or accrued to persons who are not related parties with respect to the taxpayer and then to such related parties. IRC § 59A(c)
The changes to Section 163(j) under the One Big Beautiful Bill represent a comprehensive modernization of the business interest limitation rules. By reverting to EBITDA-based calculations, establishing clear coordination with capitalization provisions, and providing enhanced regulatory authority, these modifications should provide both immediate tax benefits and long-term planning certainty for businesses across various industries. The staggered effective dates allow for orderly implementation while the expanded regulatory authority ensures that complex coordination issues can be addressed through future guidance.
Sources
- One Big Beautiful Bill Act: Sec. 70341. Coordination of business interest limitation with interest capitalization provisions
- One Big Beautiful Bill Act: Sec. 70303. Modification of limitation on business interest
- One Big Beautiful Bill Act: Sec. 70342. Definition of adjusted taxable income for business interest limitation
- IRC § 59A(c)
- IRC § 163(j)
- IRS Notice 2018-28
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