IRS Form 8990 – In today’s complex tax landscape, businesses must navigate various deductions and limitations to optimize their financial strategies. One critical area is the deduction for business interest expenses, governed by Section 163(j) of the Internal Revenue Code. IRS Form 8990 plays a pivotal role in calculating these limitations, ensuring compliance while maximizing allowable deductions. This article provides a comprehensive overview of Form 8990, including its purpose, filing requirements, calculation methods, and recent updates for tax years beginning in 2025 and beyond.
Whether you’re a small business owner, corporate tax professional, or accountant, understanding the business interest expense limitation under Section 163(j) can help avoid costly errors and leverage available tax benefits.
What Is IRS Form 8990 and Section 163(j)?
IRS Form 8990, titled “Limitation on Business Interest Expense Under Section 163(j),” is used to compute the amount of business interest expense that can be deducted in the current tax year and the portion that must be carried forward to future years. Section 163(j) generally limits the deduction of business interest expense to the sum of:
- The taxpayer’s business interest income,
- 30% of the taxpayer’s adjusted taxable income (ATI), and
- The taxpayer’s floor plan financing interest expense.
This limitation was significantly expanded by the Tax Cuts and Jobs Act (TCJA) of 2017, aiming to prevent excessive interest deductions that could erode the tax base. Disallowed interest expenses are not lost; they can be carried forward indefinitely, subject to future limitations.
The form is essential for taxpayers with business interest expenses, as it ensures the deduction aligns with Section 163(j) rules, applied after other limitations like basis, at-risk, and passive activity loss rules.
Who Must File Form 8990?
Not every taxpayer needs to file Form 8990. Filing is required if you have:
- Business interest expense,
- A disallowed business interest expense carryforward from prior years,
- Current or prior year excess business interest expense from partnerships, or
- You’re a pass-through entity (like a partnership or S corporation) allocating excess taxable income or excess business interest income to owners.
Exceptions include small business taxpayers who meet the gross receipts test—average annual gross receipts of $31 million or less for the prior three tax years (adjusted for inflation in 2025). These small businesses are generally exempt unless they have excess business interest from partnerships. Additionally, certain excepted trades or businesses, such as electing real property, farming, or regulated utilities, may opt out of the limitation.
For partnerships and S corporations, the limitation is calculated at the entity level, with excesses allocated to partners or shareholders. Consolidated groups file a single Form 8990, while U.S. shareholders of controlled foreign corporations (CFCs) may need to attach it to Form 5471.
If you’re unsure, consult the IRS instructions: small businesses without applicable interest expenses or pass-through allocations typically don’t file.
Key Definitions in Section 163(j) and Form 8990
To accurately complete Form 8990, familiarize yourself with these core terms:
- Business Interest Expense: Interest allocable to non-excepted trades or businesses, excluding investment or personal interest.
- Adjusted Taxable Income (ATI): Tentative taxable income adjusted by adding back items like non-business losses, NOL deductions, and (for 2025+) depreciation, amortization, and depletion. ATI is floored at zero, except for CFC groups.
- Floor Plan Financing Interest: Interest on debt secured by inventory for motor vehicles, trailers, or campers held for sale or lease—fully deductible and added back to the limitation.
- Excess Business Interest Expense: Disallowed amounts at the partnership level, allocated to partners (not carried forward by the partnership).
- Tentative Taxable Income (TTI): Taxable income computed as if no Section 163(j) limitation applied, excluding prior disallowed interest.
These definitions ensure precise calculations, especially for mixed businesses allocating interest between excepted and non-excepted activities.
How to Calculate the Business Interest Expense Limitation?
Form 8990 is divided into parts and schedules for systematic computation. Here’s a step-by-step overview:
Part I: Computation of Allowable Business Interest Expense
This section is required for all filers subject to Section 163(j).
- Business Interest Expense (Lines 1-5): Enter current year expense (Line 1), prior carryforwards (Line 2), partner excesses (Line 3), floor plan financing (Line 4), and total (Line 5).
- Adjusted Taxable Income (Lines 6-22): Start with TTI (Line 6), add back adjustments like NOLs and depreciation (Lines 7-16), subtract reductions like non-business income (Lines 17-21), and compute ATI (Line 22).
- Business Interest Income (Lines 23-25): Enter current income (Line 23), excesses from pass-throughs (Line 24), and total (Line 25).
- Limitation Calculations (Lines 26-31): Compute 30% of ATI (Line 26), add floor plan (Line 27), and determine the allowable deduction (Line 30) and disallowed carryforward (Line 31).
Parts II and III: Pass-Through Items
- Part II (Partnerships): Allocate excesses like business interest expense (Line 32) and taxable income (Lines 33-36).
- Part III (S Corporations): Allocate excess taxable income (Lines 38-41) and interest income (Line 42).
Schedules A and B
- Schedule A: Summarizes partners’ excess items from partnerships.
- Schedule B: Summarizes shareholders’ excesses from S corporations.
Use Worksheets A and B for partnership allocations, and Worksheet C for CFC safe-harbor elections.
| Key Calculation Components | Description | Impact on Deduction |
|---|---|---|
| Business Interest Income | Income from non-excepted activities | Increases allowable deduction |
| 30% of ATI | Core limitation threshold | Caps based on earnings |
| Floor Plan Financing | Debt for vehicle inventory | Fully deductible, no limit |
| Carryforwards | Disallowed prior amounts | Added to current expense |
Recent Updates and Changes for 2025
The One Big Beautiful Bill Act (OBBBA) introduced favorable changes effective for tax years beginning after 2024. Key updates include:
- ATI Add-Back: Depreciation, amortization, and depletion are now added back to ATI, reverting to an EBITDA-like measure and increasing deductions.
- Expanded Floor Plan Financing: Now includes trailers and campers for recreational use.
- Coordination with Capitalization: Starting 2026, the limitation applies regardless of whether interest is capitalized under Sections 263(g) or 263A(f).
- Exclusions from ATI: For 2026+, certain foreign inclusions (e.g., Subpart F, GILTI) are excluded from domestic ATI.
These changes make the limitation less restrictive, but businesses should review elections (e.g., for real property or farming) which are irrevocable and require alternative depreciation systems.
Filing Instructions and Tips
File Form 8990 with your tax return (e.g., Form 1065 for partnerships, Form 1120 for corporations). Attach statements for elections, and use U.S. dollars for all calculations. For CFCs, consider the safe-harbor election to simplify compliance.
Common tips:
- Aggregate gross receipts for controlled groups.
- Allocate interest properly for mixed activities.
- Request information from pass-through entities if needed.
Download the latest Form 8990 and instructions from the IRS website for the most current version.
Conclusion
Mastering IRS Form 8990 and the Section 163(j) limitation is crucial for businesses with significant interest expenses. By understanding filing requirements, calculations, and recent OBBBA updates, you can ensure compliance and optimize deductions. Always consult a tax professional for personalized advice, as rules can vary by entity type and jurisdiction.
For more details, visit the IRS page on Form 8990 or review the official instructions. Stay informed—tax laws evolve, and proactive planning can yield substantial savings.