Overview of Limitation on Deduction of 

Business Interest: Section 163(j)

Prepared by the Staff of the Joint Committee on Taxation

March 2019
Overview

 Public Law 115-97 (the “Act”) added new section 163(j) to the 

Internal Revenue Code (the “Code”).

 This new rule generally limits the amount of a taxpayer’s business 

interest deduction to the sum of:

 The taxpayer’s business interest income;

 30% of the taxpayer’s adjusted taxable income; and

 The floor plan financing interest of the taxpayer.

 Any business interest expense in excess of this threshold is carried 

forward to the following year.

 The limitation generally does not apply to small businesses (other 

than tax shelters), regulated public utilities, and electing farming 

or real property trades or businesses.

2
3 Background
Background: Interest Deduction Generally

 Taxpayers are generally allowed to deduct 

interest paid or accrued within the taxable year 

on indebtedness.

 The Code does not define “interest.”

 The Supreme Court has defined interest as 

“compensation for the use or forbearance of money.” 

Deputy v. Du Pont, 308 U.S. 488, 498 (1940).

4
Background: Interest Deduction Generally

 Section 163 contains numerous exceptions to and limitations on 

a taxpayer’s ability to deduct interest, for example:

 For taxpayers other than corporations, the deduction for interest 

on indebtedness allocable to investment property is limited to the 

taxpayer’s net investment income for the taxable year;

 Personal interest (generally, interest on indebtedness not properly 

allocable to a trade or business or investment property) is 

generally not deductible, but there are important exceptions. 

 For example, some interest on indebtedness secured by a qualified 

residence (mortgage interest) and some interest on student loans 

may be deductible.

5
Background: Prior-Law Section 163(j)

 Prior-law section 163(j) limited a corporation’s interest 

deduction in circumstances that indicated the corporation 

was paying interest to related parties to reduce U.S. 

taxable income. 

 Generally, the rule applied to a corporation with a high debt-toequity ratio making large interest payments (relative to adjusted 

taxable income) to related parties not subject to U.S. tax (e.g., a 

foreign affiliate).

 Adjusted taxable income for purposes of prior-law section 163(j) 

was defined to roughly approximate earnings before interest, 

tax, depreciation, or amortization (“EBITDA”).

 Because of its focus on reductions in the U.S. tax base, this rule 

was often referred to as addressing “earnings stripping.”

6
Background: From Prior-Law to Present-Law

 Section 13301 of the Act replaced prior-law section 

163(j) with present-law section 163(j), which has broader 

application. The new rule:

 Applies to business interest expense of all taxpayers (not just 

corporations) regardless of debt-to-equity ratio and 

regardless of status of the lender (i.e., related or unrelated);

 Retains old section 163(j)’s focus on the relationship between 

interest payments and an adjusted taxable income; and

 Addresses debt financing generally, and does not focus 

primarily on scenarios reflecting the potential for earnings 

stripping.

7
8 Present Law
Present-Law Section 163(j)

 For any taxpayer, the amount allowed as a deduction for 

business interest for the taxable year is limited to the sum 

of:

 The business interest income of the taxpayer for the taxable 

year;

 30% of the adjusted taxable income of the taxpayer for the 

taxable year; and

 The floor plan financing interest of the taxpayer for the 

taxable year.

 By including business interest income in the calculation, the 

rule operates to limit deduction only of net business 

interest expense.

9
Present-Law Section 163(j)

 The limitation applies at the taxpayer level.

 For example, the limitation applies at the consolidated tax 

return filing level, because the consolidated group is a 

single taxpayer.

 For partnerships and S corporations, the limitation applies 

at the entity level.

 Any business interest not allowed as a deduction for 

any year may be carried forward indefinitely.

 There is a special carryforward rule for partnerships.

10
Defined Terms: Business Interest and Business 

Interest Income

 Business interest means any interest paid or 

accrued on indebtedness properly allocable to a 

trade or business.

 Business interest income means the amount of 

interest includible in the gross income of the 

taxpayer for the taxable year which is properly 

allocable to a trade or business.

11
Defined Terms: Adjusted Taxable Income

 Adjusted taxable income (“ATI”) means the taxable 

income of the taxpayer computed without regard to:

 Any item of income, gain, deduction, or loss that is not 

properly allocable to a trade or business;

 Any business interest or business interest income;

 The amount of any net operating loss deduction;

 The amount of any deduction allowed under section 199A; 

and (definition continues on next slide)

12
Defined Terms: Adjusted Taxable Income (cont.)

 For taxable years beginning before January 1, 2022, ATI is 

computed without regard to any deduction allowable for 

depreciation, amortization, or depletion.

 This definition of ATI generally corresponds with the financial 

accounting concept of EBITDA.

 For taxable years beginning on or after January 1, 2022, ATI is 

computed with regard to deductions for depreciation, 

amortization, and depletion. 

 This definition of ATI generally corresponds with the financial 

accounting concept of earnings before interest and taxes, or EBIT.

 As a result, for taxpayers with such deductions, the limitation 

becomes more stringent in taxable years beginning on or after 

January 1, 2022.

13
Defined Terms: Floor Plan Financing

 Floor plan financing interest means interest paid or accrued on floor plan 

financing indebtedness.

 Floor plan financing indebtedness means indebtedness used to finance the 

acquisition of motor vehicles held for sale or lease to retail customers and secured 

by the inventory so acquired.

 Motor vehicle means a motor vehicle that is:

 Any self-propelled vehicle designed for transporting persons or property on a public street, 

highway, or road;

 A boat; or

 Farm machinery or equipment.

 Once a taxpayer takes floor plan financing interest into account in calculating its 

business interest limitation, the taxpayer may not claim bonus depreciation under 

section 168(k) for property placed in service during such year and subsequent 

years.

 The taxpayer can choose not to take floor plan financing into account in computing its 

business interest limitation, in which case the taxpayer may claim bonus depreciation (if floor 

plan financing was not taken into account in a prior year).

14
Carryforward Rules

 For taxpayers other than partnerships, the amount of any business 

interest not allowed as a deduction for any taxable year is treated as 

business interest paid or accrued in the succeeding taxable year.

 The business interest carried forward is added to any business interest in 

the succeeding year and then subjected to the limitation for that year.

 For corporations, this carryforward is subject to limitation by section 382.

 Partnerships have a special carryforward rule (discussed in more detail 

below) requiring any business interest in excess of the partnership’s 

limitation to be allocated to partners in the same manner as the 

partner’s distributive share of partnership interest expense. 

15
Application to Passthrough Entities

 For partnerships and S corporations (together, 

“passthroughs”), the limitation applies at the entity 

level.

 The amount of business interest paid or incurred by a 

passthrough that may be deducted is determined by the 

business interest income, adjusted taxable income, and floor 

plan financing interest of the passthrough for the taxable 

year.

 In this respect, the limitation treats passthroughs as entities 

rather than aggregates of their owners.

16
Passthroughs: Anti-double-counting rules

 Anti-double-counting rules provide that any business interest 

income, adjusted taxable income, or floor plan financing interest 

that gives rise to additional business interest deduction at the 

passthrough level does not also increase any passthrough owner’s 

business interest limitation.

 These rules also allow business interest income and adjusted 

taxable income that does not give rise to additional business 

interest deduction at the passthrough level to increase owners’ 

limitations.

 Without these rules, items of business interest income, adjusted 

taxable income, or floor plan financing interest of the 

passthrough might be viewed as generating additional deduction 

as the items are passed through to the owners.

17
Passthroughs: Allocation of Excess Items under 

Anti-Double-Counting Rules

 The passthrough rules require allocations of 

section 163(j) items (i.e., allowed and disallowed 

business interest of the passthrough, excess 

business interest income of the passthrough, and 

excess taxable income of the passthrough) 

consistent with the allocations of the economic 

items associated with those section 163(j) items.

18
Passthroughs: Allocation of Excess Items under 

Anti-Double-Counting Rules

 Generally, with respect to partnerships, the anti-double-counting rules 

require that:

 Allowed business interest (i.e., business interest of the passthrough that does not 

exceed the passthrough’s business interest limitation) and disallowed business interest 

(i.e., business interest of the passthrough in excess of the passthrough’s business 

interest limitation) are allocated in the same manner as passthrough interest 

expense, taking into account the partners’ distributive shares of items generating 

limitation;

 Excess business interest income (i.e., business interest income of the passthrough in 

excess of what was necessary for the passthrough to deduct business interest) is 

allocated in the same manner as passthrough interest income, taking into account the 

partners’ distributive shares of allowed business interest; and

 Excess taxable income (“ETI”) (i.e., adjusted taxable income in excess of what was 

necessary for the passthrough to deduct business interest) is allocated in the same 

manner as items comprising adjusted taxable income of the partnership, taking into 

account the partners’ distributive shares of allowed business interest and excess 

business interest income under the anti-double-counting rules.

19
Passthroughs: Carryforwards of Disallowed 

Business Interest of a Partnership

 If a partner in a partnership is allocated disallowed 

business interest, that amount carries forward at the 

partner level until the next subsequent year that excess 

business interest income or ETI are allocated to the 

partner by the partnership.

 In a subsequent taxable year, the partner’s share of the 

partnership’s disallowed business interest is treated as business 

interest paid by the partner to the extent of the partner’s 

distributive share of excess business interest income and ETI of the 

partnership in such year.

 This rule limits the deductibility of the partner-level carryforward 

based on the activities of the partnership that gave rise to that 

carryforward.

20
Passthroughs: Using Carryforwards

in Future Years

 When disallowed business interest is allocated to a 

partner, the partner’s basis in its partnership interest 

is reduced (but not below zero) by the amount of any 

such allocation.

 In a future year, if the partner deducts the disallowed 

business interest, the deduction does not affect the 

partner’s basis in its partnership interest.

 If the partner disposes of its partnership interest, the 

partner’s basis is increased by any disallowed business 

interest that has been allocated to the partner and 

reduced the partner’s basis but has not been deducted.

21
Effect of the Special Carryforward Rule

for Partnerships

 Two examples in the appendix to this presentation illustrate three summary points 

about the way the special partnership carryforward rule works as currently drafted 

and interpreted by Treasury:

 In the current year (i.e., without regard to carryovers), the ability to deduct 

partnership business interest is limited by partnership business interest income, 

partnership ATI, and partnership floor plan financing;

 Any interest that is not deductible in the current year does not carry forward at the 

partnership level, but rather is allocated to the partners, where future potential 

deductions depend on future amounts allocated from the partnership that generated 

the carryforward; and 

 A partner’s ability to deduct a carryforward in the future may depend not only on 

business interest income allocated to the partner by the partnership that generated 

the carryforward, but also on other activities of the partner or entities the partner 

owns.

 While not inconsistent with the wording of the statute, this third point is inconsistent 

with the intended function of the partnership carryforward rule as described on 

pages 177 – 178 of JCT’s General Explanation of Public Law 115-97 (JCS-1-18).

22
Exceptions: Small Business and Employees

 Certain small businesses.–Section 163(j) does not 

apply to any taxpayer (other than a tax shelter) for 

which the average annual gross receipts for the 

three-taxable-year period ending with the prior 

taxable year does not exceed $25 million.

 Employees.–The trade or business of performing 

services as an employee is not treated as a trade or 

business for purposes of section 163(j).

23
Exceptions: Utilities

 Certain regulated utilities.–The trade or business of the furnishing or 

sale of (1) electrical energy, water, or sewage disposal services, (2) gas 

or steam through a local distribution system, or (3) transportation of gas 

or steam by pipeline, if the rates for such furnishing or sale, as the case 

may be, have been established or approved by 

 A State or political subdivision thereof, 

 Any agency or instrumentality of the United States,

 A public service or public utility commission or other similar body of a State or 

any political subdivision thereof, or

 The governing or ratemaking body of an electric cooperative, 

is not treated as a trade or business for purposes of section 163(j).

 Any property primarily used by such utilities is not eligible for bonus 

depreciation under section 168(k).

24
Exceptions: Elections

 Elections:

 Electing real property trade or business.–Any electing real property trade or 

business as defined in section 469(c)(7)(C) (see next slide) is not treated as a trade or 

business for purposes of section 163(j).

 Electing farming business.–Any electing farming business is not treated as a trade or 

business for purposes of section 163(j). A farming business is:

 A farming business as defined in section 263A(e)(4) (see next slide); or

 A trade or business of a specified agricultural or horticultural cooperative (as defined in 

section 199A(g)(4)).

 Effect of an election:

 An electing real property trade or business is required to use the alternative 

depreciation system (“ADS,” a slower system of cost recovery than might otherwise be 

available) to depreciate any of its nonresidential real property, residential rental 

property, qualified improvement property, qualified leasehold improvement property, 

qualified retail improvement property, and qualified restaurant property.

 An electing farming business is required to use ADS to depreciate any property with 

a recovery period of 10 years or more.

25
Exceptions: Elections

 Real property trade or business as defined in section 469(c)(7)(C): any real property 

development, redevelopment, construction, reconstruction, acquisition, conversion, rental, 

operation, management, leasing, or brokerage trade or business.

 Farming business as defined in section 263A(e)(4): the trade or business of farming, including 

the trade or business of operating a nursery or sod farm, or the raising or harvesting of trees 

bearing fruit, nuts, or other crops, or ornamental trees (other than Christmas trees). 

 Treasury Regulation section 1.263A-4(a)(4) further defines a farming business as a trade or business 

involving the cultivation of land or the raising or harvesting of any agricultural or horticultural 

commodity. 

 Examples of a farming business include the trade or business of operating a nursery or sod farm; the 

raising or harvesting of trees bearing fruit, nuts, or other crops; the raising of ornamental trees (other 

than evergreen trees that are more than six years old at the time they are severed from their roots); and 

the raising, shearing, feeding, caring for, training, and management of animals. 

 A farming business also includes processing activities that are normally incident to the growing, raising, 

or harvesting of agricultural or horticultural products. 

 A farming business does not include contract harvesting of an agricultural or horticultural commodity 

grown or raised by another taxpayer, or merely buying and reselling plants or animals grown or raised 

by another taxpayer. 

26
Effective Date

 Applies to taxable years beginning after December 

31, 2017.

 Business interest expense that was disqualified under

old section 163(j) for the last taxable year beginning 

before January 1, 2018, is carried forward and 

treated as business interest paid or accrued in the 

first taxable year beginning after December 31, 

2017 and subject to new section 163(j).

27
28 Data
Share of Entities with Interest Deductions

by Type, Tax Year 2016

29

No Interest Deduction

Interest Deduction

36%

64%

C Corporations

39%

61%

S Corporations

13%

87%

Partnerships

7%

93%

Sole Proprietorships
Share of Total Interest Deductions by Entity Type, 

Tax Year 2016

30

83%

5%

11%

1%

C Corporation S Corporation Partnership Sole Proprietorship
Dollar Value of Interest Deductions by Entity Size, 

Tax Year 2016 (All Entity Types)

31

Gross Receipts*

* Gross Receipts generally excludes dividends, interest, rents, royalties, and gains, even if they are a part of operating income

0 200 400 600 800

$0 or less

$1 to $100,000

$100,001 to $250,000

$250,001 to $500,000

$500,001 to $1,000,000

$1,000,001 to $5,000,000

$5,000,001 to $10,000,000

$10,000,001 to $25,000,000

$25,000,001 to $50,000,000

More than $50,000,000

Total Interest Paid ($ Billions)
C Corporation Interest Deductions by Industry, 

Tax Year 2016

32

0

20

40

60

80

100

120

140

160

180

200

Manufacturing Finance and

Insurance

Management of

Companies

Information Retail and

Wholesale Trade

Utilities Real Estate and

Rental and

Leasing

All Other

Industries

Billions

Value of Interest Deductions
Additional Resources

 Joint Committee on Taxation, General Explanation of 

Public Law 115-97 (JCS-1-18), December 2018,

pp. 172-179

 REG–106089–18 (proposed regulations interpreting 

section 163(j))

 Rev. Proc. 2018-59 (IRS revenue procedure treating 

certain infrastructure business as real property 

trades or businesses for purposes of section 163(j))

33
34 Appendix
Partnership Carryforward Examples

 Assume a taxpayer, XYZ Corp, that:

 Is not eligible for any of the exceptions to 

application of section 163(j);

 Is a C corporation that is a partner in in two 

partnerships, Alpha and Bravo, both of which have 

one other partner with whom XYZ Corp shares all 

income and expenses equally, and neither of which 

have floor plan financing indebtedness; and

 Has no income, expenses, etc. other than those 

allocated by Alpha and Bravo.

35
Partnership Carryforward Example 1

 Year 1 Facts: 

 Alpha 

 $40m of business interest 

 No business interest income

 $200m of ATI 

 Bravo 

 $200m of business interest 

 No business interest income

 $250m of ATI 

 XYZ Corp has no income, expenses, etc. other than 

those allocated by Alpha and Bravo.

36
Partnership Carryforward Example 1

 Year 1 analysis: Alpha

 Alpha’s interest limitation is $60m: the sum of its business interest 

income of zero and 30% of its $200m of ATI. 

 The $60m limitation exceeds Alpha’s business interest of $40m, so 

none of Alpha’s current year business interest is disallowed as a 

deduction by section 163(j)(1).

 XYZ Corp is allocated $20m of Alpha deductible business interest.

 Alpha’s ETI is the amount which bears the same ratio to Alpha’s ATI 

as (1) the excess of (a) 30% of Alpha’s ATI ($60) over (b) the 

amount by which Alpha’s business interest exceeds its business 

interest income ($40), bears to (2) 30% of Alpha’s ATI. 

 ($60m - $40m) / $60m = 1/3.

 1/3 x $200m = $66.7m ETI, $33.3m of which is allocated to XYZ Corp.

37
Partnership Carryforward Example 1

 Year 1 analysis: Bravo

 Bravo’s interest limitation is $75m: the sum of its business interest 

income of zero and 30% of its $250m of ATI.

 The $75m limitation is less than Bravo’s business interest of $200m, 

so $75m of Bravo’s current year business interest is allowed as a 

deduction by section 163(j)(1), and $125m is disallowed and 

treated as disallowed business interest.

 XYZ Corp is allocated $37.5m of Bravo deductible business interest and 

$62.5m of disallowed business interest.

 Bravo has no ETI.

38
Partnership Carryforward Example 1

 Year 1 analysis: XYZ Corp

 Amounts allocated to XYZ Corp by Alpha and Bravo:

 From Alpha: $20m deductible business interest, $33.3m ETI

 From Bravo: $37.5m deductible business interest, $62.5m disallowed business interest

 XYZ Corp has no other income, expenses, etc.

 XYZ Corp’s ATI is $33.3m: the sum of zero ATI from XYC Corp’s activities viewed in 

isolation and $33.3m ETI from Alpha. 

 XYZ Corp has no business interest in year 1.

 The disallowed business interest allocated by Bravo is not treated as business interest of 

XYZ Corp in Year 1, and therefore is not deductible using XYZ Corp’s ATI. 

 XYZ Corp year 1 results:

 $57.5m deductible interest ($20m from Alpha and $37.5m from Bravo)

 $62.5m disallowed business interest carryforward attributable to Bravo

 $33.3m of unused ATI does not carry forward

39
Partnership Carryforward Example 1

 Year 2 facts: 

 Alpha 

 $9m of business interest

 No business interest income

 $150m of ATI 

 Bravo 

 No business interest

 No business interest income

 $150m of ATI 

 XYZ Corp has no income, expenses, etc. other than those 

allocated by Alpha and Bravo, and has a $62.5m carryover 

of Bravo’s year 1 disallowed business interest.

40
Partnership Carryforward Example 1

 Year 2 analysis: Alpha

 Alpha’s interest limitation is $45m: the sum of its business interest 

income of zero and 30% of its $150m of ATI. 

 The $45m limitation exceeds Alpha’s business interest of $9m, so 

none of Alpha’s current year business interest is disallowed as a 

deduction by section 163(j)(1).

 XYZ Corp is allocated $4.5m of Alpha deductible business interest.

 Alpha’s ETI is the amount which bears the same ratio to Alpha’s ATI 

as (1) the excess of (a) 30% of Alpha’s ATI ($45) over (b) the 

amount by which Alpha’s business interest exceeds its business 

interest income ($9), bears to (2) 30% of Alpha’s ATI. 

 ($45m - $9m) / $45m = 4/5.

 4/5 x $150m = $120m ETI, $60m of which is allocated to XYZ Corp.

41
Partnership Carryforward Example 1

 Year 2 analysis: Bravo

 Bravo’s interest limitation is $45m: the sum of its business 

interest income of zero and 30% of its $150m of ATI.

 Bravo has no business interest, so all $150m of Bravo’s ATI 

is ETI.

 XYZ Corp is allocated $75m of Bravo’s ETI.

42
Partnership Carryforward Example 1

 Year 2 analysis: XYZ Corp

 Amounts allocated to XYZ Corp by Alpha and Bravo:

 From Alpha: $4.5m deductible business interest, $60m ETI

 From Bravo: $75m ETI

 XYZ Corp has no other income, expenses, etc., but has a $62.5m carryover of Bravo’s year 1 disallowed 

business interest.

 $62.5m business interest is treated as paid or accrued by XYZ Corp: the amount of disallowed business 

interest carryover from Bravo’s year 1 activities that does not exceed the sum of ETI and excess business 

interest income allocated to XYZ Corp by Bravo in the current year ($75m). 

 XYZ Corp’s ATI is $135m: the sum of zero ATI from XYC Corp’s activities viewed in isolation, $60m ETI 

from Alpha, and $75m ETI from Bravo.

 XYZ Corp’s interest limitation is $40.5m: the sum of its business interest income of zero and 30% of its 

ATI of $135m.

 The $40.5m limitation is less than Bravo’s business interest of $62.5m, so $40.5m of Bravo’s current year 

business interest is allowed as a deduction by section 163(j)(1), and $22m is treated as a carryforward 

of XYZ Corp business interest.

 XYZ Corp year 2 results:

 $45m deductible interest ($4.5m from Alpha and $40.5m from XYZ Corp)

 $22m carryforward to year 3

43
Partnership Carryforward Example 2

 Year 1 facts: Same as in example 1.

 Year 2 Facts: 

 Alpha 

 No business interest

 No business interest income 

 No ATI 

 Bravo 

 No business interest

 No business interest income

 $120m of ATI 

 XYZ Corp has no income, expenses, etc. other than those allocated 

by Alpha and Bravo, and has a $62.5m carryover of Bravo’s year 1 

disallowed business interest.

44
Partnership Carryforward Example 2

 Year 2 analysis: Alpha and Bravo

 Alpha has no business interest, no business interest 

income, and no ATI, and therefore nothing to analyze 

under section 163(j).

 Bravo’s interest limitation is $36m: the sum of its 

business interest income of zero and 30% of its 

$120m of ATI.

 Bravo has no business interest, so all $120m of 

Bravo’s ATI is ETI.

 XYZ Corp is allocated $60m of Bravo’s ETI.

45
Partnership Carryforward Example 2

 Year 2 analysis: XYZ Corp

 Amounts allocated to XYZ Corp by Alpha and Bravo:

 From Bravo: $60m ETI

 XYZ Corp has no other income, expenses, etc., but has a $62.5m carryover of Bravo’s year 1 disallowed 

business interest.

 $60m business interest is treated as paid or accrued by XYZ Corp: the amount of disallowed business interest 

carryover from Bravo’s year 1 activities that does not exceed the sum of ETI and excess business interest income 

allocated to XYZ Corp by Bravo in the current year ($60m).

 The remaining $2.5m continues to be treated as a carryforward of disallowed business interest attributable to Bravo in 

succeeding years until Bravo allocates sufficient ETI or excess business interest income to XYZ Corp.

 XYZ Corp’s ATI is $60m: the sum of zero ATI from XYC Corp’s activities viewed in isolation, zero ETI from Alpha, 

and $60m ETI from Bravo.

 XYZ Corp’s interest limitation is $18m: the sum of its business interest income of zero and 30% of its ATI of 

$60m.

 The $18m limitation is less than Bravo’s business interest of $60m, So $18m of Bravo’s current year business 

interest is allowed as a deduction by section 163(j)(1), and $42m is disallowed and treated as a carryforward 

pf XYZ Corp business interest.

 XYZ Corp year 2 results:

 $18m deductible interest (from XYZ)

 $42m carryforward to year 3

 $2.5m disallowed business interest carryforward attributable to Bravo

46