How the One Big Beautiful Bill Act changes the business interest expense limitation
The OBBBA’s core change to the business interest expense deduction limitation is the reintroduction of the DDA addback to ATI. This adjustment reverses the post-2021 tightening of the interest limitation, which had excluded those non-cash expenses and, as a result, reduced the amount of deductible interest for many businesses.
The restored EBITDA-based approach is particularly beneficial for companies with significant capital investment or amortizable intangibles, as such deductions increase the overall 30% limitation calculation.
The legislation also includes several other technical refinements. It excludes from the ATI calculation certain international tax items, such as:
- Subpart F income
- Net CFC tested income (formerly GILTI, or global intangible low-taxed income)
- The section 78 gross-up
- The portion of the deductions allowed under sections 245A(a)
This provision may impact companies that have made a controlled foreign corporation (CFC) group election to increase their ATI basis under section 163(j).
Importantly, the OBBBA also modifies the treatment of electively capitalized interest. Starting in tax years after Dec. 31, 2025, any business interest expense that is electively capitalized to property will retain its character as interest and remain subject to the section 163(j) limitation. This effectively removes a planning tool that some businesses had used to manage taxable income and interest deduction timing.
The legislation also expands the floor plan financing exception to include non-self-propelled trailers and campers used for recreational purposes. While this provision may be less broadly impactful, it reflects the bill’s intent to fine-tune the application of section 163(j) across industries.
What the changes to the business interest expense deduction limitation mean for businesses
For many companies, the return to an EBITDA-based limitation will generally increase the amount of deductible interest expense—particularly those with large depreciation or amortization deductions. This is especially relevant for capital-intensive industries and businesses that have recently undergone acquisitions, where goodwill amortization can significantly affect ATI.
However, the loss of elective capitalization as a planning tool may reduce flexibility. Businesses that previously capitalized interest to personal property—especially those without significant capital assets—may find themselves with fewer options to optimize their business interest deduction.
It’s also worth noting that the restored DDA addback aligns with the permanent reinstatement of 100% bonus depreciation under the OBBBA. Its permanence ensures that businesses will continue to generate substantial depreciation deductions—further enhancing the benefit of the EBITDA-based limitation.
Steps businesses should take now
Businesses should begin modeling the multiyear impact of these changes. This includes evaluating how the restored DDA addback will affect their interest deductions in 2025 and beyond, as well as how the loss of elective capitalization may alter their tax posture starting in 2026.
It’s also important to consider how these changes interact with other tax provisions and economic factors. For example, the ability to electively capitalize R&D costs could influence ATI and interest deductibility in future years. Similarly, scheduled debt refinancings, changes in borrowing rates, and shifts in the cost of labor and materials should all be factored into planning models.
Long-term considerations
Looking ahead, businesses should revisit their capital investment strategies and financing structures. The OBBBA’s restoration of the EBITDA-based limitation represents a return to a more flexible and investment-friendly tax environment. But it also introduces complexities, particularly around the treatment of capitalized interest and the interaction with other tax provisions.
Tax departments should integrate these changes into broader planning efforts, including M&A activity, international structuring, transfer pricing and R&D investment strategies. Proactive modeling and scenario planning will be essential to ensure that businesses can fully leverage the restored deduction.
