The IRS on August 19, 2026, released an updated set of frequently asked questions on the Section 163(j) limit on business interest deductions. The new version, Fact Sheet FS-2026-14, replaces FS-2025-09 from December 2025 and reflects changes made by the 2025 tax law, including the return of the depreciation add-back and new rules for owners of foreign corporations, according to IR-2026-94.
What changed
The basic formula is unchanged. A business may deduct interest expense up to the total of its business interest income, 30 percent of its adjusted taxable income, or ATI, and any floor plan financing interest. Interest that exceeds the cap carries forward to later years.
The FAQs confirm three shifts in how ATI is measured. First, for tax years beginning after December 31, 2024, depreciation, amortization and depletion are again added back when computing ATI. From 2022 through 2024 those add-backs were not allowed, which shrank ATI and the cap for capital-intensive businesses. Second, for tax years beginning after December 31, 2025, U.S. shareholders must exclude inclusions under Sections 951(a), 951A(a) and 78 from ATI, reversing earlier guidance that let those amounts raise the cap. Third, the limit applies to all business interest except amounts capitalized under Section 263(g) or Section 263A(f).
The fact sheet also notes that, for tax years beginning after 2024, trailers and campers designed as temporary living quarters count as motor vehicles for floor plan financing.
Who is affected
Businesses that pass the gross receipts test and are not tax shelters are exempt. The FAQs set the three-year average threshold at $31 million for 2025 and $32 million for 2026. Many family real estate partnerships sit below that line. Larger portfolios, operating businesses with significant debt and syndicated real estate funds are more likely to be inside the limit, and so are the partners and S corporation shareholders who receive their share of any disallowed interest.
Real estate businesses have a way out: an election to be treated as an electing real property trade or business, which removes the Section 163(j) cap entirely. The FAQs restate the price. Electing businesses must depreciate certain property under the Alternative Depreciation System, which uses longer recovery periods, and those assets are not eligible for bonus depreciation. The election is generally irrevocable and binding for later years, although the FAQs point to Revenue Procedure 2026-17 for a path to withdraw it.
The after-tax math
The depreciation add-back can change the calculation more than any other item.
| Example: leveraged property business | ATI without add-back | ATI with add-back |
|---|---|---|
| Taxable income before interest | $600,000 | $600,000 |
| Depreciation added back | $0 | $400,000 |
| Adjusted taxable income | $600,000 | $1,000,000 |
| Interest cap at 30% | $180,000 | $300,000 |
| Deductible of $280,000 interest paid | $180,000 | $280,000 |
In this illustration, restoring the add-back lets the business deduct an extra $100,000 of interest in the current year. For an owner in the 37 percent bracket, that is roughly $37,000 of federal tax deferred or saved now instead of carried forward. With the cap no longer binding, the business may have less reason to make the real property election and accept slower depreciation, which is the trade-off many owners weighed while the add-back was unavailable.
Moves to discuss with your advisor
- Owners who made the real property election in 2022 through 2024 may want a CPA to rerun the cap under current ATI rules and compare it with the depreciation given up under ADS, including the loss of bonus depreciation.
- Groups near the $32 million line often consider how aggregation rules count related entities toward the gross receipts test.
- Partners with carryforwards of excess business interest from earlier years can ask how much may be freed up as partnership ATI rises.
- Owners of businesses with foreign subsidiaries should expect a smaller ATI once CFC inclusions are excluded starting in 2026.
What to watch
The FAQs are informal guidance and do not carry the weight of regulations. Watch for updated Form 8990 instructions, any further guidance on withdrawing the real property election under Revenue Procedure 2026-17, and the inflation-adjusted gross receipts threshold for 2027.
Sources
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
