New Tax Law Expands Business Interest Expense Deductions

December 8, 2025

If your business pays interest on loans, there’s good news on the horizon. The recently enacted One Big Beautiful Bill (OBBB) introduces changes that make it easier for businesses to deduct interest expenses for tax years beginning in 2025 and beyond. Here’s what you need to know.

Why This Matters

Interest paid or accrued by a business is generally deductible for federal tax purposes—but there are limits. Historically, the deduction has been capped at 30% of adjusted taxable income (ATI). Any amount above that limit gets carried forward to future years.

This rule applies to most business entities, including partnerships, LLCs, and corporations. For pass-through entities like partnerships and S corporations, the limitation is applied first at the entity level and then at the owner level under complex rules.

What’s Changing Under OBBB

The new law introduces two major changes:

  1. A More Generous ATI Calculation

Starting in 2025, ATI will be calculated before deductions for depreciation, amortization, or depletion. This aligns ATI more closely with EBITDA (earnings before interest, taxes, depreciation, and amortization), effectively increasing ATI and allowing for larger interest expense deductions.

  1. Expanded Floor Plan Financing
    The definition of floor plan financing now includes loans for trailers and campers designed for temporary living quarters (think recreational or seasonal use). Businesses in these sectors will also benefit from higher deductible interest expenses.

Who’s Exempt From the Limitation?

Several businesses don’t have to worry about these rules at all:

  • Small Businesses: If your average annual gross receipts for the prior three years don’t exceed the inflation-adjusted threshold—$31 million for 2025 and $32 million for 2026—you’re exempt.
  • Electing Real Property Businesses: These businesses agree to use longer depreciation periods for certain assets.
  • Electing Farming Businesses: Similar trade-off as real property businesses.
  • Utility Providers: Businesses furnishing electricity, water, sewage, gas, or steam under regulated rates.

If you’re considering electing out of the limitation, weigh the trade-off between deducting more interest now versus slower depreciation deductions later.

Bottom Line

The rules around business interest expense deductions are complex, and these changes add new layers. If your business could be affected, now is the time to plan. Larger deductions may mean significant tax savings—but only if you navigate the rules correctly.

Consult your Lumsden McCormick tax advisor to understand how these changes apply to your business.

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