Navigating New Section 163(j) Interest Deduction Rules for Real Estate and Construction

Planning for changes to the Adjusted Taxable Income limit

Starting in 2018, the Tax Cuts and Jobs Act (TCJA) introduced section IRC Section163(j) limitations around the deductibility of business interest. Under these provisions, deductible business interest was limited to business interest income and 30% of a business’s Adjusted Taxable Income (ATI). ATI was calculated as a company’s income before interest, taxes, depreciation and amortization, or tax EBITDA.

A business’ ability to add back depreciation to their ATI calculation, the Section 163(j) interest deduction limitation did not significantly impact the real estate and construction industries. However, this changed starting in 2022. For tax years beginning January 1^st, 2022, and after, the ATI calculation no longer allowed companies to add back depreciation and amortization. The ATI calculation then became tax EBIT, which in turn, caused many real estate professionals, developers, and construction contractors subject to the limitations.

How the OBBBA reframes EBITDA and business interest limits

Under the new provisions of the OBBBA that became law July 4, 2025, and effective for tax years beginning after December 31, 2024, the ATI calculation reinstated the inclusion of depreciation and amortization (returning to tax EBITDA). This will allow many businesses, especially in the real estate and construction sectors, to once again benefit from the interest deduction that was limited in previous years.

The new provisions of the OBBBA also included some less favorable changes to interest expense that should be included in the limitation calculation. Starting in tax years beginning January 1^st, 2026, all business interest, regardless of deductibility, should be included in this calculation. This is a major change for developers who were capitalizing interest expense to include in costs of goods sold as inventory or as a depreciable asset. Previously, businesses could recharacterize interest to inventory or construction in process to avoid the 163(j) limitations, but this will no longer be the case for tax years beginning January 1^st, 2026.

Business considerations for maximizing interest deductions

With changes coming for tax years 2025 and 2026, there should be additional considerations by businesses on how to maximize the amount of interest they can deduct in a given year. While the new rules eliminate the benefits of capitalizing interest to avoid the 163j limitations, there could be other opportunities to maximize deductible interest. This begins with managing ATI for 2025 and beyond.

Businesses may want to increase ATI in 2025 by capitalizing interest and deferring capital expenditures into 2026. Once interest capitalization is no longer beneficial in calculating ATI for section 163j limitations in 2026, depreciation addbacks will hold more weight in the ATI computation.

Businesses will need to be mindful of their specific situation and the nuances included within the OBBBA. Contact your Keiter Opportunity Advisor to help you understand how this legislation will directly impact your business. Call 804.747.0000 | Email