On August 19, 2026, the IRS announced in IR-2026-94 that it had updated its frequently asked questions about the limitation on deductions for business interest expense under section 163(j).
The revised guidance appears in Fact Sheet FS-2026-14, which supersedes FS-2025-09 and addresses amendments made by the 2017 Tax Cuts and Jobs Act and the One, Big, Beautiful Bill Act.
How the Business Interest Limitation Works
When section 163(j) applies, deductible business interest expense generally cannot exceed the sum of:
- Business interest income for the tax year
- 30% of adjusted taxable income (ATI) for the tax year
- Floor plan financing interest expense for the tax year
Business interest expense disallowed by the limitation generally carries forward to the next tax year. Special rules apply to partnerships and S corporations.
The Small-Business Exception
The limitation generally applies to taxpayers with business interest expense, but certain small businesses that satisfy the section 448(c) gross receipts test are exempt. The IRS says a business generally meets that test for 2026 if it is not a tax shelter and its average annual gross receipts for the previous three years are $32 million or less.
Gross receipts aggregation and tax-shelter rules can make this test more complex than the headline threshold suggests. A business near the limit should confirm its treatment with a tax professional.
Changes Reflected in the Updated FAQs
FS-2026-14 explains four current-law changes or clarifications, including:
- For tax years beginning after December 31, 2024, depreciation, amortization, and depletion deductions are added back when calculating ATI
- The floor plan financing definition includes certain trailers and campers for tax years beginning after December 31, 2024
- Except for interest capitalized under sections 263(g) or 263A(f), section 163(j) applies to business interest expense regardless of whether it would otherwise be deducted or capitalized under a mandatory or elective capitalization provision
- For tax years beginning after December 31, 2025, specified controlled foreign corporation income inclusions and related deductions are excluded from a U.S. shareholder’s ATI calculation
The fact sheet also removes obsolete CARES Act questions and distinguishes substantive changes from clarifications of existing law.
Why It Matters for Schedule C Filers
Many sole proprietors will fall within the small-business exception, but business structure, aggregated gross receipts, tax-shelter status, and the type of business can affect the result. Schedule C filers with significant borrowing costs should keep loan statements and records showing how borrowed funds were used, then confirm whether the interest is deductible under section 163(j) and other applicable rules.
Simple-C helps Schedule C filers keep business income and expenses organized — giving you cleaner records to review with your tax professional.
This article provides general information, not tax advice. Business interest rules depend on the taxpayer’s facts and can change. Confirm current requirements with the IRS and a qualified tax professional.