When I work with business clients, one of the tax provisions that often catches them by surprise is IRC Section 163J. It’s not a flashy topic, but understanding it can significantly impact your bottom line. This rule was expanded under the Tax Cuts and Jobs Act of 2017 and now applies to a broad range of U.S. businesses, not just foreign-owned subsidiaries. Its intention is twofold: to help pay for the TCJA and to encourage companies to consider equity over debt financing.

Here’s the core of it—IRC 163J limits the amount of business interest expense you can deduct to 30% of your adjusted taxable income (ATI), plus your total business interest income. There are exceptions, of course. Car dealerships can continue deducting floor plan financing in full. Smaller businesses with average gross receipts of $31 million or less over the last three years are also exempt from these rules. Farming and real estate businesses can opt out entirely, though doing so means using the alternative depreciation system (ADS), which increases the recovery period for assets and ultimately reduces annual deductions.

From a tax planning perspective, the complexity increases depending on your business structure. For C corporations, the limitation applies directly at the corporate level. Any nondeductible interest simply carries forward for possible deduction in future years. But with partnerships, it’s a different story. The limitation is calculated at the partnership level, but any disallowed interest expense gets passed down to each partner via their K-1. Those partners can only use that excess business interest expense in future years when the same partnership produces enough income to absorb it.

Sole proprietors and landlords who exceed the income threshold must apply the same general rule, tracking any excess interest on their personal returns. I can’t stress enough how important it is for individuals in these scenarios to maintain accurate carry-forward records—it’s far too easy for deductions to slip through the cracks.

A major change came in 2022 that’s thrown a wrench into this calculation for many. Prior to that year, we could add back depreciation and amortization when calculating ATI, which gave businesses a higher income base and, in turn, a larger deduction. That benefit expired, and now, taking larger depreciation deductions actually reduces ATI, limiting how much interest can be deducted. That means businesses must now evaluate whether aggressive depreciation is still the smartest move, especially when weighed against interest deduction caps.

There are also common compliance pitfalls I’ve seen time and again. Some companies with highly variable income don’t realize they’ve crossed the threshold and should be applying the limitation. Others fail to make the election to opt out when they qualify—especially in the real estate sector—and miss the chance to use more favorable depreciation timelines. And for partnerships, I’ve seen too many partners lose track of their carry-forward interest amounts because they’re not keeping tabs on prior-year K-1s.

For clients affected by 163J, a few planning strategies have been effective. Slowing down depreciation to lift ATI is one approach. Others have capitalized interest costs into inventory or equipment purchases, reclassifying them so they’re no longer subject to the limitation. And of course, determining whether you qualify to opt out altogether is worth exploring, especially for real estate and agriculture operations.

Ultimately, this is a moving target. The gross receipts exemption threshold adjusts each year for inflation, and legislative changes could further shift the ground. My best advice is to stay proactive. Work closely with your CPA throughout the year—waiting until filing season is often too late to make meaningful changes. When you understand the rules, track your numbers closely, and plan ahead, you position your business to take full advantage of available deductions while staying compliant.