How the One Big Beautiful Bill Changes the Business Interest Deduction (Section 163(j)) — What California Business Owners Need to Know

The One Big Beautiful Bill (OBBB) introduced significant changes to the limitation on the deduction for business interest expense under Internal Revenue Code Section 163(j). While this provision has existed for several years, the recent updates materially change how many businesses calculate their allowable interest deduction starting in 2025 and again in 2026.

At Velin & Associates, Inc., we work closely with creators, ecommerce businesses, medical practices, and high-net-worth individuals who often rely on financing to grow. These changes can create meaningful tax savings — but only if they are properly understood and applied.

Below is a practical breakdown of what changed, who is affected, and how these rules apply in real-world situations we commonly see with our clients.

What Is the Section 163(j) Business Interest Limitation?

In general, businesses can deduct interest paid or accrued during the year. However, Section 163(j) limits how much business interest expense can be deducted in a given tax year.

Under the limitation, deductible business interest is capped at the sum of:

1. Business interest income

2. 30% of Adjusted Taxable Income (ATI)

3. Floor plan financing interest (for applicable businesses)

Any interest that exceeds this limit is not lost — it is carried forward to future years.

Key Change #1 (Effective for Tax Years Beginning After December 31, 2024)

Depreciation, Amortization, and Depletion Are Added Back to ATI Again

One of the most impactful updates under OBBB is the restoration of depreciation, amortization, and depletion add-backs when calculating Adjusted Taxable Income.

Why This Matters

From 2022 through 2024, many capital-intensive businesses saw their ATI reduced because depreciation was no longer added back — limiting their ability to deduct interest. The new rule reverses that for 2025 and beyond.

Example:

CPA for Shopify Store / CPA for Amazon Business

A Shopify store owner finances inventory and warehouse improvements using business loans. In 2025:

• Net taxable income: $600,000

• Depreciation expense: $180,000

• Business interest expense: $150,000

Under the new rules, depreciation is added back when calculating ATI, increasing the allowable interest deduction. This often allows our ecommerce clients to deduct tens of thousands more in interest compared to prior years.

Key Change #2: Expanded Definition of Floor Plan Financing Interest

OBBB expands what qualifies as floor plan financing interest by redefining “motor vehicle” to include:

• Trailers

• Campers

• Recreational and seasonal-use vehicles designed to be towed or affixed to a motor vehicle

Example:

CPA for Filmmakers / CPA for Creators

A production company finances camera trailers and mobile living units used during on-location shoots. Previously, interest on these loans did not qualify as floor plan financing interest.

Under the updated definition, this interest may now be fully deductible outside the 30% ATI limitation, improving cash flow and reducing taxable income.

Small Business Exemption: Gross Receipts Test Still Applies

Businesses with average annual gross receipts below the inflation-adjusted threshold are exempt from Section 163(j).

• 2024 threshold: $30 million

• 2025 threshold: $31 million

If your business falls below the threshold, the limitation does not apply — even if it applied in prior years.

Example:

CPA for TikTokers / CPA for YouTubers

A content creator exceeded $30 million in gross receipts during a viral growth period and was subject to the interest limitation in 2024. In 2025, revenue stabilized below $31 million.

Result:
✔ No Section 163(j) limitation in 2025
✔ Prior-year disallowed interest becomes fully deductible

This is a critical planning opportunity we monitor closely for creators with fluctuating income.

Key Change #3 (Effective for Tax Years Beginning After December 31, 2025)

Capitalized Interest Is Now Included in the Limitation

Starting in 2026, most interest that is capitalized during the year is treated as business interest subject to Section 163(j) — except for interest capitalized under specific inventory and farming rules.

Example:

CPA for Medical Practice / CPA for Doctors

A medical practice finances the construction of a new office and capitalizes interest during the build-out phase. Beginning in 2026, that capitalized interest must be considered when applying the interest limitation.

Without proper modeling, this can unexpectedly limit deductions and increase tax liability.

Special Rules for Partnerships and S Corporations

Section 163(j) applies differently depending on entity structure:

• Partnerships: The limitation is calculated at the partnership level, and disallowed interest (EBIE) is passed to partners.

• S Corporations: The limitation applies at the entity level, and excess interest stays with the corporation.

Example:

Dental Business CPA / Dentist CPA

A multi-owner dental practice structured as an S corporation finances expensive equipment. If interest is limited, the disallowed amount carries forward at the corporate level — not to individual shareholders.

This distinction often impacts entity selection and financing strategy.

Why These Changes Matter for High-Income and Growth-Oriented Businesses

These updates are especially relevant for:

• CPA for Online Commerce

• CPA for Creators and Filmmakers

• CPA for Doctors and Medical Practices

• CPA for Dental Practices

• CPA for High Net Worth Individuals

Businesses using leverage to scale operations must reassess:

• Loan structuring

• Timing of asset purchases

• Depreciation strategy

• Entity classification

Without proactive planning, interest deductions can be delayed for years.

How Velin & Associates, Inc. Helps Clients Navigate Section 163(j)

At Velin & Associates, we don’t just calculate compliance — we use these rules strategically.

Our services include:

• Modeling interest deductibility before loans are finalized

• Evaluating whether a small business exemption applies

• Advising on elections for real estate and farming businesses

• Coordinating depreciation and financing strategies

• Reviewing partnership and S corporation interest allocations

• Integrating interest planning into multi-year tax projections

The changes under the One Big Beautiful Bill make 2025–2026 a critical window for tax planning.

Final Thoughts

The updated Section 163(j) rules create meaningful opportunities — but only for businesses that plan ahead. With depreciation add-backs restored and new definitions expanding deductible interest, many taxpayers will see improved outcomes if their strategy is aligned early.

If your business uses financing, now is the time to review your structure and projections.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

CPA for YouTubers | CPA for Shopify Store | CPA for Online Commerce | CPA for Creators | Shopify Store CPA | CPA for Filmmakers | CPA for Amazon Business | Amazon Business CPA | CPA for Dental Practice | Dentist CPA | Dental Business CPA | CPA for TikTokers | CPA for Doctors | CPA for Medical Practice | CPA for High Net Worth Individuals