Business interest deductions in 2026: does the limit apply to you?

A business loan's interest may be deductible, but Section 163(j) can limit how much business interest is deducted in a year. The first question for many Houston small businesses is whether they are exempt from that particular limit.

For 2026, the inflation-adjusted gross receipts amount is $32 million. The test generally looks at average annual gross receipts for the preceding three years, and the small-business exemption is not available to a tax shelter. Related-business aggregation and other special rules may affect the test. The IRS updated its business interest FAQs on August 19, 2026.

Start with the exemption, not the formula

A business with annual sales far below $32 million should still document why it meets the test. The result is not determined by this month's deposits or the balance on the loan.

Prepare revenue totals for the lookback years and a list of related entities and ownership relationships. Ask your preparer whether aggregation, a short year or the tax-shelter definition changes the analysis. The tax-shelter definition can be technical and does not simply mean a business marketed as a tax shelter.

Being exempt from Section 163(j) also does not make every financing charge automatically deductible. Other rules and the use of borrowed funds can still matter.

If the limitation applies

The general limit includes business interest income, 30% of adjusted taxable income, and floor-plan financing interest expense. Adjusted taxable income, or ATI, is a tax calculation rather than the profit number displayed in accounting software.

For tax years beginning after December 31, 2024, the law restored the addback for depreciation, amortization and depletion when calculating ATI. This can affect the interest capacity of businesses with significant depreciable assets. It does not remove the need to calculate the limit.

Here is a deliberately simplified illustration: if an affected business has $200,000 of ATI and no business interest income or floor-plan financing interest, 30% of ATI is $60,000. That figure illustrates one component of the calculation; entity-level rules and other facts must still be checked.

Reconcile debt before planning around it

Keep loan statements and amortization schedules together. Separate principal repayments from interest, and document new borrowing, refinancing and how proceeds were used. If interest was limited in an earlier year, preserve the carryforward schedules.

A tax projection based on the whole loan payment as an expense will distort profit. A projection that ignores prior limited-interest balances can also be incomplete.

Tax N Tips offers bookkeeping and tax planning. Book a consultation to review the debt schedule alongside your business forecast.

Sources checked September 5, 2026.