S-Corp Business Interest Deduction: 2026 163(j) Rules
If your S-corp carries a loan, and your s-corp business interest deduction got squeezed the last few years, the math just changed in your favor. The OBBBA restored the more generous EBITDA-based calculation for the Section 163(j) interest limitation, effective for tax years beginning after December 31, 2024. That means your first calendar-year return to benefit was 2025, and the same rule carries into 2026. Here is what actually changed, who it applies to, and what to check before you file.
What the S-Corp Business Interest Deduction Limit Caps
Section 163(j) limits how much business interest expense you can deduct in a year. Under the IRS’s current guidance, your deductible business interest expense cannot exceed the sum of your business interest income, 30% of your adjusted taxable income (ATI), and any floor plan financing interest expense. Anything disallowed does not disappear. It carries forward to future years, though how that carryforward works is different for an S-corp than it is for a sole proprietor or a partnership, which matters below.
The entire fight over this provision has always come down to one question: what counts inside adjusted taxable income? A bigger ATI means a bigger 30% cap and more deductible interest. A smaller ATI means the opposite.
EBITDA Is Back for 2025 and Beyond
This is the change that matters most. From 2018 through 2021, ATI was calculated on an EBITDA basis, meaning depreciation, amortization, and depletion deductions were added back before applying the 30% limit. Starting in 2022, that addback expired under prior law, and ATI shifted to an EBIT basis, which is a smaller number for any business with significant depreciation. That shift quietly tightened the interest limitation for capital-intensive S-corps for three straight years.
The OBBBA reversed this permanently. For tax years beginning after December 31, 2024, you again add back depreciation, amortization, and depletion when computing ATI. If your S-corp owns real estate, equipment, or other depreciable property financed with debt, this restores real headroom under the 30% cap and can free up interest expense that would have been disallowed under the 2022–2024 rules.
Check the Small Business Exemption First
Before any of the ATI mechanics matter, confirm whether Section 163(j) even applies to you. A business is exempt if it is not a tax shelter under Section 448(d)(3) and its average annual gross receipts over the prior three tax years fall at or below the inflation-adjusted threshold under the Section 448(c) gross receipts test. The IRS has set that threshold at $30 million for 2024, $31 million for 2025, and $32 million for 2026. Most S-corps in the s-corp.biz client base fall well under this line and are not subject to the limitation at all.
Watch the trailing three-year average, not just the current year. If your gross receipts spiked in a prior year and then came back down, you calculate the average across the three most recent completed tax years each time you file. A business that was over the line for 2024 can fall back under the exemption for 2025 if its trailing average drops below $31 million, and in that case any interest that had been carried forward from the limited year is no longer subject to the 163(j) cap once the exemption applies.
How This Works Inside Your S-Corp Specifically
The 163(j) limitation is calculated at the entity level for an S-corp, just as it is for a partnership — the difference is what happens to interest that gets disallowed. If your S-corp’s interest expense exceeds the limit, the disallowed amount stays at the corporate level and carries forward to the S-corp’s own future tax years. A partnership’s disallowed interest instead passes out to its partners as excess business interest expense, so your shareholders never report a personal carryforward of disallowed interest the way a partner would.
What does flow through to shareholders is excess taxable income and excess business interest income, allocated pro rata by shares outstanding, in years where the S-corp had more ATI capacity than it needed. That allocation can matter for shareholders who are separately subject to their own interest limitations on other activities, so it is worth confirming your K-1 reflects it correctly.
Reconsider a Real Property Trade or Business Election
If your S-corp previously elected to be treated as an excepted real property trade or business specifically to escape the tighter EBIT-based limitation, it is worth revisiting that decision now. The tradeoff for that election has always been depreciating your real property under the slower alternative depreciation system (ADS) and giving up bonus depreciation on it. With EBITDA restored and 100% bonus depreciation also made permanent under the OBBBA, that election may now be costing you more in lost bonus depreciation than it is saving you in freed-up interest.
These elections are generally irrevocable once made, but the IRS has issued transition guidance in Revenue Procedure 2026-17 allowing taxpayers who made the election for a tax year beginning in 2022, 2023, or 2024 to withdraw it by filing an amended return for the election year. That window is closing: the amended return is due by the earlier of October 15, 2026, or the close of the statute of limitations for the election year. If you made this election, that makes it a conversation to have with your CPA now, not something to leave on autopilot.
What This Means for Your 2026 Planning
For most small S-corps, none of this applies because gross receipts fall under the exemption threshold. For S-corps carrying real estate debt, equipment financing, or acquisition loans above the $31–32 million range, the restored EBITDA calculation is a meaningful and permanent improvement over the 2022–2024 rules, and it is worth revisiting any planning decisions, including excepted trade elections, that were made to work around the tighter version of this limitation. The interaction between your interest deduction, your bonus depreciation, and your other OBBBA provisions is exactly the kind of coordinated calculation that is easy to get wrong working from memory of the old rules.
If your S-corp is carrying business debt, whether from a recent refinance, an acquisition, or a cost segregation study that accelerated depreciation, it is worth running the 163(j) numbers before you file. Schedule a consultation with our team to see how the restored EBITDA calculation and the current gross receipts thresholds apply to your specific numbers.