H.R. 1, P.L. 119-21, the law commonly known as the One Big Beautiful Bill Act (OBBBA), contains provisions of special interest to business taxpayers. This article summarizes some of them and offers tax planning tips.
Practitioners are always seeking proactive tax advice to provide to our clients or apply within our own businesses. At first glance, many of the business tax provisions in H.R. 1, P.L. 119–21, the law commonly known as the One Big Beautiful Bill Act (“the act”), appear to be a reinstatement of previous tax rules. Bonus depreciation and the current deductibility of research–and–development (R&D) costs have been restored, for example. However, the act offers many new and valuable opportunities encouraging a range of practical tax planning strategies. This article discusses several of them.
Using Sec. 163(j) to maximize the tax deduction for business interest expense
Owners often consider whether to borrow money to grow their business operations. A huge component of that decision is the deductibility of interest on the loans. Sec. 163(j) imposes a potentially significant limitation on the deductibility of such interest. The computation of that limitation has been modified by the act.
In 2017, as part of the Tax Cuts and Jobs Act (TCJA), P.L. 115–97, Congress significantly restricted the ability to deduct interest expense by businesses, enacting Sec. 163(j), which limits the deduction of business interest (generally, interest paid or accrued on debt properly allocable to a trade or business). Over the years, there have been several changes to the computation of the Sec. 163(j) limit.
The limit on the deduction of business interest under Sec. 163(j) is the sum of:
- The taxpayer’s business interest income for the tax year;
- 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year; and
- The taxpayer’s floor plan financing interest expense for the tax year.
The most significant change introduced by the act relates to item 2 above, how ATI is calculated.
From the enactment of Sec. 163(j) in the TCJA until 2021, any deduction allowable for depreciation, depletion, or amortization was excluded from the calculation of ATI for purposes of the limitation, effectively raising the limitation amount. However, for tax years starting after 2021, these items were included in calculating ATI. The act permanently restores the rule that applied before 2022. Effective for tax years beginning after Dec. 31, 2024, deductions for depreciation, depletion, and amortization are again excluded from the calculation of ATI. As a result, ATI will be higher in 2025 and later years for many businesses.
The following example shows the positive impact of the new and helpful provision:
Example: A C corporation has $1,500,000 of income after all deductions except those for depreciation, depletion, amortization, and interest. The corporation’s depreciation, depletion, and amortization is $300,000, and it paid interest to a bank on a business loan of $450,000. Assume the company has neither interest income for the year nor floor plan financing interest expense (i.e., items 1 and 3 of the business interest limitation described above do not apply).
Under the rule in effect immediately prior to the act, the interest deduction would have been calculated as shown in the table “Interest Deduction Before H.R. 1.”
Therefore, under this computation, the corporation cannot deduct all its interest in the current tax year. The $90,000 of nondeductible interest ($450,000 — $360,000) is carried forward to the subsequent year and treated as business interest paid in that year.
Under the new rule, beginning in 2025, the interest deduction is calculated as shown in the table “Interest Deduction After H.R. 1.”
As seen in this example, the new law provides for a significantly larger deduction for interest paid. In this example, the change in the act allows for the full deduction of interest in the year incurred.
In the current year, tax planning discussions with clients who have significant debt or are planning to incur debt should include the impact of the new favorable provision. Calculations should reflect that deductions for depreciation, depletion, and amortization are no longer excluded when computing ATI. Showing clients the resulting increase in allowable business interest deductions can help them better understand the tax benefits of borrowing and improve their overall decision of how much debt to take on.
The revised calculation of ATI will have a significant impact on capital–intensive businesses that have substantial depreciation, depletion, and amortization expenses, notably, in combination with the act’s provisions increasing depreciation deductions, discussed later in this article. For clients planning to use debt to acquire new property, tax planning conversations should also address whether it would be more advantageous for the property to be purchased or leased.
It is important, however, to keep in mind that the limitation under Sec. 163(j) does not apply to a “small” business (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting). For 2025, a small business is one with average annual gross receipts for the three prior years that do not exceed $31 million. In addition, the business interest limitation does not apply to electing real property trades or businesses, which are excluded for purposes of Sec. 163(j).