October 3, 2025
Written by Andreea Gheorghita, CPA
Signed into law in July 2025, the One Big Beautiful Bill Act (OBBBA) introduces significant changes to Internal Revenue Code (IRC) Section 163(j), permanently reinstating the more favorable earnings before interest, taxes, depreciation, and amortization (EBITDA)-based calculation for business interest expense limitations. These revisions are designed to enhance deductibility and provide flexibility for businesses, especially those in capital-intensive industries.
Return to EBITDA-Based Limitation
Background
- Prior to 2022, businesses could add back depreciation and amortization to calculate adjusted taxable income (ATI), effectively using an EBITDA approach.
- From 2022, the rules shifted to an earnings before interest and taxes (EBIT) calculation, which excluded depreciation and amortization, resulting in a lower ATI and a stricter interest deduction limit.
OBBBA Update
- For tax years beginning after December 31, 2024, the OBBBA permanently restores the EBITDA-based calculation for ATI.
- Businesses can now add back depreciation, amortization, and depletion when calculating ATI, allowing for a higher interest deduction ceiling (30% of ATI).
Example
- Company A has taxable income of $1,000,000, depreciation of $200,000, and interest expense of $400,000.
- Under EBIT rules: ATI = $1,000,000, 30% limit = $300,000, only $300,000 of interest is deductible.
- Under OBBBA (EBITDA rules): ATI = $1,000,000 + $200,000 = $1,200,000, 30% limit = $360,000, now $360,000 of interest is deductible.
- Result: Company A can deduct $60,000 more in interest expense under OBBBA.
Changes to Capitalized Interest
Background
- Previously, some taxpayers could capitalize interest (e.g., under Section 263A) to avoid the Section 163(j) limitation, treating it as part of an asset’s cost rather than an interest expense.
OBBBA Update
- For tax years beginning after December 31, 2025, any business interest expense that is electively capitalized to property will retain its character as interest and remain subject to the Section 163(j) limitation.
- This removes a common planning strategy for avoiding the limitation.
Example:
- Company B capitalizes $100,000 of interest to inventory.
- Old rule: This interest could escape the 163(j) limitation.
- OBBBA rule: The $100,000 remains subject to the 163(j) limitation, even if capitalized.
Floor Plan Financing Expansion
OBBBA Update
- The definition of “motor vehicles” for the floor plan financing interest deduction is expanded to include trailers and campers designed for temporary living quarters for recreational, camping, or seasonal use.
- This change is effective for tax years beginning after December 31, 2024.
Example
- Company C finances inventory of campers and trailers.
- Old rule: Only self-propelled vehicles qualified.
- OBBBA rule: Campers and trailers now qualify, allowing more interest expense to be deducted.
Exclusion of Certain International Tax Items
OBBBA Update
- ATI calculation effective for tax years beginning after Dec 31, 2025, excludes certain international tax items, such as Subpart F inclusions under Section 951(a), Section 956 inclusions, net tested income inclusions under Section 951A (formerly GILTI), Section 78 gross-up, and certain Section 245A deductions.
- This may impact multinational companies that previously increased their ATI basis via controlled foreign corporation (CFC) group elections.
Summary Table: OBBBA Section 163(j) Updates
| Change | Industries Most Impacted | Planning Tip |
|---|---|---|
| EBITDA-based ATI | Manufacturing, real estate, tech, private equity | Model future interest deductions; consider refinancing |
| Expanded floor plan financing | Automotive, recreational vehicles, trailer dealers | Document qualifying inventory for deduction |
| Capitalized interest now subject to 163(j) | All, especially construction, manufacturing | Review capitalization strategies |
| Exclusion of international tax items | Multinationals | Reassess CFC group elections and ATI calculations |
| Small business exception | All small businesses | Monitor gross receipts and aggregation rules |
Tax Planning Strategies Under OBBBA
Model Multiyear Impacts
Businesses should project future taxable income, interest expense, and depreciation/amortization to optimize debt structures and maximize interest deductions.
Review Debt Arrangements
With higher deductible interest, companies may consider refinancing or increasing leverage where appropriate.
Capitalize on Floor Plan Financing
Dealers of campers, trailers, and similar inventory should ensure proper documentation to benefit from the expanded deduction.
Reevaluate Capitalized Interest
Starting in 2026, capitalized interest retains its character as interest and is subject to the 163(j) limitation. Businesses should review capitalization strategies and consider alternatives for managing interest expense timing.
International Tax Planning
Multinationals should note that certain international tax items (e.g., Subpart F income, CFC tested income) are now excluded from ATI, potentially reducing the interest deduction for groups with foreign subsidiaries.
Conclusion
The OBBBA’s changes to Section 163(j) are broadly favorable for capital-intensive industries and businesses with significant depreciation or amortization. Small businesses remain largely unaffected due to the gross receipts exception. All businesses should review their debt structures, model the impact of the restored EBITDA calculation, and update tax planning strategies in light of the new rules for capitalized interest and international tax items.
To learn more about OBBBA, visit our One Big Beautiful Bill Act resource page, or connect with our team to continue the conversation.
Andreea Gheorghita, CPA, works with Clark Nuber’s Tax Services Group. She primarily serves clients in the real estate and hospitality.
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