{"id":1004776749,"date":"2025-11-05T10:23:06","date_gmt":"2025-11-05T18:23:06","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004776749"},"modified":"2025-11-05T11:10:27","modified_gmt":"2025-11-05T19:10:27","slug":"how-obbba-changes-the-business-interest-expense-limitation","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/how-obbba-changes-the-business-interest-expense-limitation\/","title":{"rendered":"How\u00a0OBBBA\u00a0Changes the Business Interest Expense Limitation"},"content":{"rendered":"
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Tito Garcia and Stefan Massie<\/figcaption><\/figure><\/div>\n\n\n

The business interest expense limitation under Section 163(j), originally created by the Tax Cuts and Jobs Act in 2017, received significant changes under the recently enacted One Big Beautiful Bill Act.<\/p>\n\n\n\n

Given the general debt service on real estate ventures, careful strategizing around these changes is needed to fully realize tax planning opportunities.<\/p>\n\n\n\n

Here’s a look at how the OBBBA\u00a0changed\u00a0Section 163(j), how it impacts the real estate sector and how to leverage the changes to benefit your business.<\/p>\n\n\n\n

Changes to business interest limitation computation<\/h2>\n\n\n\n

When TCJA was passed in 2017, the changes to Section 163(j) significantly restricted the ability to deduct business interest expense. This restriction limited the current deduction to 30 percent of adjusted taxable income plus business interest income. <\/p>\n\n\n\n

The original calculation of ATI included an add-back of depreciation and amortization, resulting in ATI that resembled the concept of earnings before interest, taxes, depreciation and amortization. However, for years beginning after Dec. 31, 2021, taxpayers\u00a0could no longer\u00a0add back depreciation and amortization, an unfavorable change.<\/p>\n\n\n\n

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LIKE THIS CONTENT?<\/strong> Subscribe to the CPE Capital Markets Newsletter<\/a><\/p>\n\n\n\n

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Depreciation and amortization add-backs<\/strong><\/h2>\n\n\n\n

The\u00a0OBBBA reinstates and makes permanent the add-back of depreciation and amortization in figuring a taxpayer\u2019s ATI\u00a0for tax years beginning after Dec. 31, 2024. This favorable change should increase the amount of deductible interest in a tax year for real estate businesses, as\u00a0depreciation deductions may be significant. Given the current interest rate environment, this tax law change is welcomed by most real estate ventures.<\/p>\n\n\n\n

Planning insight <\/strong><\/h2>\n\n\n\n

Coupled with 100 percent bonus depreciation made permanent by\u00a0the\u00a0OBBBA, the ability to add back depreciation with respect to determining ATI for purposes of\u00a0the\u00a0Section 163(j) limitation allows a business to take advantage of increased depreciation deductions without sacrificing interest expense deductions.<\/p>\n\n\n\n

Elective capitalization use<\/strong><\/h2>\n\n\n\n

The\u00a0OBBBA modifies Section 163(j) to require that the limitation be applied before any elective capitalization\u2014for\u00a0example,\u00a0Section 263A for construction of designated property\u2014for tax years beginning after Dec. 31, 2025. This unfavorable change eliminates any potential elective interest capitalization strategies, effectively removing the ability to recharacterize the interest before applying the limitation.<\/p>\n\n\n\n

Planning insight <\/strong><\/h2>\n\n\n\n

With the ability to add back depreciation and amortization in 2025 and the elective capitalization rule changes taking effect in 2026, taxpayers may want to consider increasing\u00a02025 ATI through interest capitalization planning before it\u2019s no longer available.\u00a0<\/p>\n\n\n\n

ATI exclusions<\/strong><\/h2>\n\n\n\n

The\u00a0OBBBA modifies the Section 163(j) definition for ATI to exclude various foreign-related inclusion and gross-up amounts for tax years beginning after Dec. 31, 2025.\u00a0This\u00a0will impact\u00a0businesses with controlled foreign corporations that have interest expense subject to Section 163(j).\u00a0<\/p>\n\n\n\n

Organizations with foreign entities in their structure should carefully digest these rules. These changes could reduce the anticipated benefit of the add-back of depreciation and amortization to ATI.<\/p>\n\n\n\n

Section 163(j) small-business exception\u00a0<\/strong><\/h2>\n\n\n\n

Section 163(j) provides an exception for any business that doesn\u2019t have average annual gross receipts for the prior three tax years that exceed a certain threshold. In 2024, that threshold was $30 million. The OBBBA increases that threshold to $31 million for the 2025 tax year. <\/p>\n\n\n\n

While the threshold has been adjusted for inflation since Section 163(j) was enacted in 2017, businesses should revisit this exception annually if their gross receipts are materially close to the applicable threshold for the tax year.<\/p>\n\n\n\n

Determining whether a taxpayer meets the small business exception can be complex. For example, the exception isn\u2019t available to taxpayers who meet the definition of a tax shelter under Section 448(a)(3). In addition, taxpayers may be subject to aggregation rules under Section 448(c)(2) for purposes of determining whether the gross receipt test is met. Consulting with a tax advisor is key to navigating this area successfully.<\/p>\n\n\n\n

Real property trade or business election<\/strong><\/h2>\n\n\n\n

Qualifying\u00a0real estate businesses can elect to be exempted from the application of Section 163(j) when making\u00a0a one-time, irrevocable\u00a0real property trade or business election.\u00a0<\/p>\n\n\n\n

While the election exempts a business from the interest expense limitation, the business is required to use the alternative depreciation system for certain types of property\u2014and therefore won\u2019t be able to claim bonus depreciation on such property.<\/p>\n\n\n\n

Taxpayers who\u00a0haven\u2019t made\u00a0an RPTB election should consider all tax law changes made by OBBBA, particularly the changes to the business interest expense limitation and bonus depreciation, before making the election.\u00a0<\/p>\n\n\n\n

Business expense limitation<\/strong><\/h2>\n\n\n\n

The favorable ATI changes\u00a0included in the\u00a0OBBBA\u00a0may reduce the benefit of making the RPTB election, as more interest expense is expected to be deductible. In addition,\u00a0the\u00a0OBBBA increases and makes permanent 100 percent bonus depreciation on bonus-eligible property.\u00a0<\/p>\n\n\n\n

Consider current\u00a0interest expense limitation calculations, anticipated capital\u00a0expenditures, the\u00a0timing of such projects, and the potentially unfavorable impact to depreciation expense\u00a0when deciding on\u00a0an RPTB election.<\/p>\n\n\n\n

Planning insight<\/strong><\/h2>\n\n\n\n

If a taxpayer currently has an RPTB election in place, it\u2019s generally irrevocable and remains so under the OBBBA. In the past,\u00a0the\u00a0IRS has granted a time-limited opportunity to reconsider a past RPTB election in response to tax law changes made by the CARES Act (Rev. Proc. 2020-22).\u00a0<\/p>\n\n\n\n

It\u2019s unclear if\u00a0the\u00a0Treasury will provide any guidance on how to revoke an RPTB election made in a prior tax year due to the OBBBA\u2019s\u00a0tax law changes.<\/p>\n\n\n\n

Tito Garcia is tax managing director at Baker Tilly<\/a>. Stefan Massie is a tax senior manager at Baker Tilly.<\/em><\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

What you’ll need to know before you start your tax planning.<\/p>\n","protected":false},"author":3876,"featured_media":1004776756,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[52682,21684],"tags":[46898],"class_list":["post-1004776749","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-policy","category-viewpoint","tag-baker-tilly"],"acf":[],"yoast_head":"\nHow\u00a0OBBBA\u00a0Changes the Business Interest Expense Limitation - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/how-obbba-changes-the-business-interest-expense-limitation\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How\u00a0OBBBA\u00a0Changes the Business Interest Expense Limitation\" \/>\n<meta property=\"og:description\" content=\"What you'll need to know before you start your tax planning.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/how-obbba-changes-the-business-interest-expense-limitation\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2025-11-05T18:23:06+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-11-05T19:10:27+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2025\/11\/TitoGarciaStefanMassie.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"400\" \/>\n\t<meta property=\"og:image:height\" content=\"310\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Tito Garcia and Stefan Massie\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/how-obbba-changes-the-business-interest-expense-limitation\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/how-obbba-changes-the-business-interest-expense-limitation\/\",\"name\":\"How\u00a0OBBBA\u00a0Changes the Business Interest Expense Limitation - 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