Section 163(j) in brief: the business interest limitation and who escapes it

Section 163(j) limits the business interest a taxpayer can deduct each year to its business interest income, plus 30% of adjusted taxable income (ATI), plus any floor plan financing interest. Whatever the cap disallows is not lost — it carries forward indefinitely as business interest expense in later years. The regime, rewritten by the TCJA and administered under detailed regulations at Treas. Reg. §1.163(j)-1 and following (eCFR Title 26), applies to most businesses with meaningful leverage; the statute is Section 163(j). The two escape hatches — the small-business exemption and the real property election — do most of the planning work.

How the limitation computes

ATI starts from taxable income and strips out items that would distort a financing-capacity measure: interest expense and income, NOL deductions, and Section 199A. Through 2021 it also added back depreciation, amortization, and depletion — an EBITDA base. Since 2022 it has not, and the shift to EBIT is the number that changed borrowers' lives: a real-estate-heavy or capital-intensive business whose large depreciation deductions previously raised the cap now finds those same deductions shrinking ATI and trapping interest. The interaction cuts against acceleration strategies — every dollar of bonus depreciation is a dollar out of ATI, so 30 cents of interest capacity goes with it.

Carryforwards are indefinite and deduct in future years subject to that year's cap, but they queue behind current-year interest and, in corporate acquisitions, ride the Section 382-style limitations as a pre-change attribute. Partnerships run their own version at the entity level, with disallowed interest passed to partners as excess business interest expense that waits for excess taxable income from the same partnership — a notoriously sticky attribute.

Who never enters the regime

The small-business exemption tracks the Section 448(c) gross-receipts test: average annual gross receipts for the prior three years at or below the inflation-adjusted threshold (about $31 million as of mid-2026 — the same aggregation-heavy test used across the code, with related entities counted together and tax shelters excluded regardless of size). A business under the line simply does not apply 163(j).

Why real estate cares: the RPTOB election

A real property trade or business — development, rental, management, brokerage, and the rest of the Section 469(c)(7)(C) list — may make an irrevocable election out of 163(j). The price is the alternative depreciation system (ADS) for its residential rental property (30-year straight line), nonresidential real property (40-year), and qualified improvement property (20-year). ADS property is outside bonus depreciation, so the election's real cost is concentrated in QIP, which loses 100% bonus eligibility entirely.

The trade, side by side for an electing real property business:

Note the last row: a cost segregation study's 5-, 7-, and 15-year personal property and land improvements keep their MACRS lives and bonus eligibility even inside an electing RPTOB — the election punishes the building shell and QIP, not the segregated components. That is why heavily leveraged owners often pair the election with a study: the interest deduction is saved, and most of the acceleration survives.