The One Big Beautiful Bill Act changed how businesses deduct interest expense. For companies carrying debt or investing in equipment, these changes mean more deductions and more cash staying in your accounts.
Tax years beginning in 2025 forward operate under new rules. If your business pays interest on loans, lines of credit, or financed equipment, these changes directly impact your bottom line.
The ATI Calculation Shift
Business interest deductions are limited to 30% of adjusted taxable income (ATI). The OBBBA fundamentally altered how ATI is calculated.
Previous method: ATI excluded depreciation, amortization, and depletion only through 2021. The calculation then tightened.
New method: Starting with 2025 tax years, ATI is calculated before subtracting depreciation, amortization, or depletion. Your ATI increases. Your allowable interest deduction increases proportionally.
This aligns tax calculations closer to EBITDA: earnings before interest, taxes, depreciation, and amortization. For businesses with significant depreciable assets, this change delivers substantial value.
Real Numbers
Consider a manufacturing business with $1 million in taxable income before interest and depreciation:
Under old rules (post-2021):
- Taxable income: $1,000,000
- Depreciation: $300,000
- ATI: $700,000
- Maximum interest deduction (30% of ATI): $210,000
Under new OBBBA rules:
- Taxable income: $1,000,000
- Depreciation: $300,000 (added back for ATI calculation)
- ATI: $1,000,000
- Maximum interest deduction (30% of ATI): $300,000
The difference: $90,000 in additional deductible interest expense. That translates to approximately $18,900 in tax savings at a 21% corporate rate.
Businesses with heavy machinery, real estate, or technology investments see the biggest impact. The more depreciation you claim, the higher your ATI under the new calculation, and the more interest you can deduct.
Small Business Exemption
Not all businesses face these limitations. The OBBBA maintains exemptions for smaller operations.
2026 threshold: Businesses with average annual gross receipts under $32 million are exempt from business interest limitations entirely. These businesses deduct all ordinary and necessary business interest without ATI calculations or 30% caps.
The threshold adjusts annually for inflation. Track your three-year average gross receipts to determine eligibility.
What Changed for 2026
Additional modifications took effect for tax years beginning January 1, 2026:
All business interest included in calculations. Previously, businesses could capitalize certain interest to inventory or construction projects, keeping it outside limitation calculations. That strategy ended. All business interest: whether expensed or capitalized: now falls under the limitation rules.
This removes planning complexity but eliminates a previous workaround. The trade-off: simpler compliance procedures and clearer documentation requirements.
Strategic Implications
These changes create opportunities for small business tax planning:
Accelerate equipment purchases. Higher ATI calculations make financing equipment more attractive. The interest deduction ceiling rises with depreciation, reducing the net cost of debt-financed assets.
Refinancing considerations. If previous interest limitations created carryforwards (excess interest you couldn't deduct), the expanded ATI may allow you to utilize those carryforwards faster.
Capital structure optimization. Businesses near the $32 million exemption threshold should analyze whether debt or equity financing provides better tax outcomes. Staying under the threshold preserves unlimited interest deductions.
Multi-year planning. The permanent nature of these rules (barring future legislation) allows long-term strategic planning around debt levels and asset acquisition timing.
Documentation Requirements
The IRS expects proper substantiation. Maintain records showing:
- Total interest paid or accrued
- ATI calculations with depreciation, amortization, and depletion adjustments
- Gross receipts calculations for exemption eligibility
- Interest carryforward tracking from prior years
Tax preparation for small business becomes more technical under these rules. Partnership and S corporation owners must track allocations at the entity level before passing through to individual returns.
Industry-Specific Impacts
Real estate businesses: Property depreciation significantly increases ATI. Real estate investment companies with substantial mortgage interest see enhanced deductions.
Manufacturing: Heavy equipment depreciation expands deductible interest for financed machinery and facility improvements.
Technology companies: Software development costs and equipment depreciation boost ATI calculations, benefiting businesses financing server infrastructure or hardware.
Construction: While capitalized interest must now be included in limitation calculations, the higher ATI from equipment depreciation often offsets this change.
Professional services: Lower depreciation means less ATI benefit. However, many professional service businesses fall under the $32 million exemption threshold.
Interaction with Other Deductions
The ATI calculation affects how other deductions interact with business interest limitations:
Section 179 expensing: Choosing Section 179 immediate expensing over depreciation reduces ATI since the expense isn't added back. This could lower your interest deduction ceiling. Compare scenarios before electing Section 179.
Bonus depreciation: Similar to Section 179, bonus depreciation taken in the current year reduces ATI. The new rules still add back regular depreciation, but bonus depreciation creates a planning variable.
NOL carryforwards: Net operating losses from prior years don't affect current-year ATI calculations. Interest limitation determinations happen before NOL applications.
Next Steps
Calculate your position. Run projections comparing your business interest expense to 30% of your ATI using the new calculation method. Identify whether limitations affect you.
Review financing agreements. If you're currently limited in deducting interest, the expanded ATI may change the effective cost of existing debt.
Evaluate the exemption. Businesses approaching the $32 million threshold should model how revenue growth affects interest deduction planning.
Update tax projections. Adjust quarterly estimated tax payments to reflect increased interest deductions under the new rules.
Consider carryforward strategies. If you have interest carryforwards from prior years, determine how quickly the new higher ATI allows utilization.
Professional Guidance
These rules contain complexity beyond surface calculations. Partnership allocations, controlled group aggregation, and carryforward ordering create technical challenges.
Working with experienced tax professionals ensures accurate ATI calculations and optimal planning strategies. The MCG Service team specializes in small business tax planning and helping businesses maximize deductions under current law.
Visit our tax services page to discuss how these changes affect your specific situation.
The Bottom Line
The OBBBA's interest expense changes favor businesses with debt and depreciable assets. Higher ATI calculations mean higher deduction limits, translating to real tax savings.
Small businesses under the exemption threshold retain unlimited interest deductions. Larger businesses gain expanded deduction capacity through the depreciation add-back.
These rules remain permanent barring future legislation. Build them into long-term financial and tax planning strategies.
Action required: Review your current-year interest expense and ATI calculation. Quantify your benefit under the new rules. Adjust tax estimates accordingly.
Contact MCG Service for comprehensive tax preparation for small business that captures every available deduction under the new law.