IRS updates 2026 business-interest deduction rules

The IRS has revised its frequently asked questions on the section 163(j) business-interest deduction, sharpening the compliance roadmap for companies that borrow to finance operations, acquisitions or inventory. The August 19 update arrives as the inflation-adjusted gross-receipts threshold for the small-business exception reaches $32 million for tax years beginning in 2026, according to the IRS.

The IRS’s August 19 business-interest announcement revises Fact Sheet FS-2026-14 and incorporates changes made by the One, Big, Beautiful Bill Act. The agency updated explanations of adjusted taxable income, floor-plan financing, partnerships and S corporations, while removing questions tied to temporary CARES Act rules. Internal Revenue Service

The update is not a new statute or regulation. The IRS says the FAQs have not been published in the Internal Revenue Bulletin and will not be used to resolve a case. Still, taxpayers who reasonably and in good faith rely on the FAQs generally will not face certain negligence or accuracy-related penalties to the extent that reliance causes an underpayment. The underlying law remains controlling. Internal Revenue Service

Section 163(j) generally does not apply to a business that is not a tax shelter and satisfies the small-business gross-receipts test. The IRS says the statutory $25 million amount is adjusted annually for inflation: $30 million for 2024, $31 million for 2025 and $32 million for 2026. The test uses average annual gross receipts for the three preceding tax years. Internal Revenue Service

That calculation can pull in more than the receipts shown on one entity’s return. The IRS’s Form 8990 instructions say businesses under common control, controlled groups and affiliated service groups generally must aggregate receipts. Owners of partnerships and S corporations may also have to include an allocable share of entity receipts, unless the parties are treated as a single person under the aggregation rules. Internal Revenue Service

For a business subject to the limitation, deductible interest generally is capped at business-interest income plus 30% of adjusted taxable income and floor-plan financing interest. The IRS says disallowed interest carries forward to the next taxable year, although the carryforward may remain limited if the rule continues to apply. Internal Revenue Service

The updated ATI explanation is particularly important for capital-intensive businesses. The IRS says ATI generally adds back business interest expense, the section 199A qualified-business-income deduction and depreciation, amortization or depletion deductions for taxable years beginning after December 31, 2024, among other adjustments. That can increase the limitation compared with a calculation based on ordinary taxable income, but the result still depends on the company’s full tax profile. Internal Revenue Service

Partnerships calculate the limitation at the partnership level, while S corporations generally calculate it at the corporate level. The IRS instructions state that partnerships and S corporations must pass through specified information, including excess taxable income and excess business-interest income, so owners can complete their own computations when required. Internal Revenue Service

Real-property and farming businesses may elect to be excepted trades or businesses, but the election carries a cost. The IRS says an electing real-property business generally must use the alternative depreciation system for specified property and cannot claim bonus depreciation on those assets; similar limits apply to certain longer-lived property used in an electing farming business. The election is generally irrevocable and must be attached to a timely filed return, including extensions. Internal Revenue Service

For small businesses, the immediate task is to update 2026 projections, verify related-party aggregation, identify suspended interest and coordinate entity-level data before estimated-tax payments and return preparation. Businesses near the threshold should preserve the three-year receipts calculation and document whether an exception or election applies.