The IRS Just Made Business Loan Interest Easier to Deduct — Here's the Catch

The IRS Just Changed the Math on Your Business Debt

If your business carries a loan, a line of credit, or any debt with an interest payment attached, the IRS just made a change that could put real money back in your pocket. On August 19, 2026, the agency released an updated fact sheet, FS-2026-14, spelling out how much interest on business debt owners can actually deduct — and for many small and mid-sized businesses, the answer is: more than before.

The update walks through changes made by the One, Big Beautiful Bill Act (OBBBA) to Section 163(j) of the tax code, the provision that limits how much interest expense a business can write off in a given year. The short version: the formula used to calculate that limit just got more generous, and a large slice of small businesses are exempt from the limit entirely.

What Section 163(j) Actually Limits

Since the 2017 Tax Cuts and Jobs Act, businesses have generally only been able to deduct business interest expense up to 30% of their adjusted taxable income (ATI) for the year, plus any business interest income and floor plan financing interest. Anything above that cap gets carried forward to future years instead of deducted now — which means less cash in hand today when a growing business often needs it most.

The catch has always been how "adjusted taxable income" gets calculated, because a stingier definition of ATI means a smaller 30% slice and a lower deduction.

The Change That Actually Helps: Adding Back Depreciation

Here's the part business owners with equipment loans, real estate debt, or any heavily depreciated assets should pay attention to. For tax years beginning after December 31, 2024, OBBBA lets businesses add back depreciation, amortization, and depletion deductions when calculating ATI.

In plain terms: your ATI is now calculated closer to EBITDA (earnings before interest, taxes, depreciation, and amortization) instead of EBIT (earnings before interest and taxes only). That distinction sounds technical, but it matters because EBITDA is almost always a bigger number than EBIT — especially for capital-intensive businesses like manufacturers, contractors, restaurants, and real estate operators that carry a lot of depreciable equipment or property.

A bigger ATI means a bigger 30% cap, which means more interest expense is deductible this year instead of getting stuck in a carryforward. If you've been capping out your interest deduction under the old rules, it's worth asking your accountant to rerun the numbers for your 2025 and 2026 returns.

Does Your Business Even Have to Worry About This?

Here's the best news buried in the fact sheet: a huge share of small businesses don't have to deal with the Section 163(j) limitation at all. Businesses with average annual gross receipts of $25 million or less over the prior three tax years are exempt from the interest expense limitation entirely — meaning they can deduct 100% of their business interest expense with no cap.

That threshold is adjusted for inflation every year. For 2026, the exempt-small-business gross receipts threshold is $32 million, up from $31 million in 2025 and $30 million in 2024. If your business's average revenue over the last three years falls under that number, the 30%-of-ATI limitation simply doesn't apply to you — full stop. That's a meaningful number of businesses reading this who may not need to think about any of this at all, beyond confirming they qualify for the exemption.

If you're close to that line — say, a growing business pushing past $30 million in revenue — this is worth flagging to your accountant now, because crossing the threshold means losing the full exemption and suddenly needing to calculate the ATI limitation for the first time.

Other Changes Worth Knowing About

The fact sheet also cleaned up a few other pieces of the rule:

• Floor plan financing gets broader. The definition of "motor vehicle" for floor plan financing interest purposes now includes trailers and campers designed for temporary living quarters — recreational, camping, or seasonal use — that are towed by or affixed to a motor vehicle. Dealers financing RV and camper inventory should take note.
• Capitalized interest is now explicitly included. For tax years beginning after December 31, 2025, business interest expense subject to the Section 163(j) limitation includes interest that's incurred and capitalized during the year, with narrow exceptions for interest capitalized under Sections 263(g) and 263A(f).
• Foreign income gets excluded from the ATI calculation. Also starting in tax years after 2025, a U.S. shareholder's controlled foreign corporation income inclusions (and related deductions) are excluded when calculating ATI. This mostly affects businesses with foreign subsidiaries, not your typical Main Street operation.

What This Means for You Right Now

If you're a small business owner with a loan on the books — an SBA loan, an equipment loan, a line of credit, a mortgage on your commercial property — here's the practical checklist:

• Check your average gross receipts for the past three years. If you're under $32 million, you likely don't need to worry about the interest expense limitation at all in 2026.
• If you're above that threshold, ask your tax preparer whether the depreciation add-back to ATI increases how much interest you can deduct this year compared to last year's calculation.
• If you've been carrying forward disallowed interest expense from prior years because you hit the old, tighter cap, ask whether this year's more generous ATI calculation lets you use up some of that carryforward now.
• If you're financing trailers or campers as inventory, confirm with your accountant whether the expanded floor plan financing definition changes how that debt is treated.

None of this requires you to file anything differently by a specific deadline — it's guidance on how the existing rules work, not a new form or a new due date. But it does mean the numbers your accountant plugs into your return this filing season could look different from last year's, in your favor. Businesses that are just getting their financial structure in place should also make sure basics like a clean profit and loss statement and a dedicated business bank account are in order — both make it far easier for your tax preparer to calculate ATI accurately and catch a bigger deduction when the rules shift in your favor.

The Bottom Line

Tax law changes rarely make headlines outside of accounting circles, but this one has a direct dollar impact for any business carrying debt. The combination of a higher small-business exemption threshold ($32 million in gross receipts for 2026) and a more generous ATI calculation (adding back depreciation, amortization, and depletion) means more businesses either owe no attention to this rule at all, or get to deduct more of their interest expense than they did under the prior version of the law. If you haven't talked to your accountant about Section 163(j) since OBBBA passed, now — ahead of your next tax filing — is the time.

Photo by Kelly Sikkema on Unsplash