Form 8990: When Business Interest Deductions Are Limited

Small businesses generally avoid the Section 163(j) business interest limit if they meet the gross receipts test and aren't tax shelters. However, Form 8990 may still be required when partnership interest carryovers or other filing triggers apply.

The small-business exception depends on tax rules, not employee count or loan size. Related businesses, ownership arrangements, and prior-year deductions can change the answer.

Start with the applicable receipts threshold, then consider the exceptions and filing requirements.

Key Takeaways

• The gross receipts threshold is $31 million for tax years beginning in 2025 and $32 million for those beginning in 2026.
• Related businesses may need to combine receipts, and tax shelters can't use the small-business exception.
• When Section 163(j) applies, disallowed interest generally carries forward, but partnerships have special allocation and filing rules.

When Section 163(j) Limits Business Interest

Section 163(j) limits how much business interest you can deduct during the current tax year. Paying interest doesn't automatically make the full payment deductible that year.

The general deduction formula

The deduction generally can't exceed the total of business interest income, 30% of adjusted taxable income (ATI), and floor-plan financing interest expense.

The IRS business interest limitation guidance explains this framework and its exceptions. Floor-plan financing concerns qualifying inventory financing, so it usually doesn't affect an ordinary service business.

The 30% figure applies to ATI, not revenue, outstanding debt, or the interest payment itself. As a result, a business with substantial borrowing may still deduct all its interest if sufficient capacity exists.

ATI differs from bookkeeping profit

ATI starts with taxable income and requires adjustments under Section 163(j). It isn't simply the profit shown in QuickBooks or on a financial statement.

For tax years beginning after December 31, 2024, the ATI calculation again adds back depreciation, amortization, and depletion deductions. That change can increase deduction capacity compared with the rules for 2022 through 2024.

Other adjustments still apply. Therefore, book EBITDA shouldn't replace the tax calculation.

How the Small-Business Gross Receipts Exception Works

A taxpayer generally qualifies if its average annual gross receipts don't exceed the applicable threshold and it isn't a tax shelter.

Use the threshold for the tax year

The threshold follows the year the tax year begins , rather than the year you submit the return.

The IRS Form 8990 instructions provide these inflation-adjusted amounts:

For a business with three full prior tax years, add those years' gross receipts and divide by three. An average equal to the threshold qualifies; it doesn't have to fall below it.

Measure receipts, not net income

Gross receipts generally include sales and service receipts, reduced by returns and allowances, plus applicable investment and other income. Cost of goods sold doesn't reduce gross receipts for this test.

Businesses operating for fewer than three years use the applicable period they've existed. Short tax years require annualization, and predecessor-business receipts may also count.

For individuals, Section 163(j) excludes inherently personal receipts such as employee W-2 wages, Social Security benefits, and disability benefits. Business receipts still require the appropriate aggregation analysis.

Why Related Businesses Must Combine Receipts

Separate LLCs and separate tax returns don't necessarily mean separate gross receipts tests.

Section 448(c) requires aggregation for certain businesses treated as a single employer. These include controlled corporate groups, partnerships and proprietorships under common control, and affiliated service groups.

The IRS aggregation FAQs explain how these rules affect the interest limitation exception. Ownership attribution rules can bring additional entities into the calculation, including through certain family relationships.

For that reason, reviewing only the borrowing company's sales can produce the wrong result. A company below $32 million may fail the 2026 test once required related-business receipts enter the average.

Keep an ownership chart alongside the receipts calculation. Include ownership percentages and changes during the relevant years. This matters when family-owned businesses operate multiple entities for property ownership, equipment, and day-to-day operations.

Exceptions That Need a Closer Look

Passing the receipts test is only part of the analysis. Tax-shelter status can block that exception, while qualifying business activities may provide another route.

A small business can be a tax shelter

The tax-shelter definition reaches beyond arrangements commonly described as aggressive tax planning.

One category, a syndicate, can include a partnership that allocates more than 35% of its losses to limited partners or limited entrepreneurs. A limited entrepreneur generally holds an interest without actively participating in management.

Consequently, a loss-producing business with passive owners may need to apply Section 163(j), even with modest receipts. The result depends on the ownership and loss-allocation facts, so a low revenue figure alone doesn't settle the issue.

Certain activities have separate exceptions

Electing real property trades or businesses, electing farming businesses, and certain utility businesses can qualify as excepted trades or businesses.

The real property and farming elections generally aren't revocable. They can also require different depreciation treatment for affected property.

That tradeoff deserves attention before an election. Removing an interest limitation may come with less favorable depreciation deductions. Businesses conducting both excepted and nonexcepted activities must also allocate relevant items between them.

How Entity Type Affects Interest Carryforwards

The federal tax classification determines where the limitation applies and how disallowed interest moves forward. The letters "LLC" don't answer either question.

Sole proprietorships and corporations

An individual operating a sole proprietorship generally addresses business interest on the individual return. A disregarded single-member LLC generally follows its owner's federal tax treatment.

C corporations and S corporations generally apply Section 163(j) at the corporate level. Their owners shouldn't assume that corporate borrowing becomes personally deductible interest.

Disallowed business interest generally carries forward without a fixed expiration period. However, future deduction capacity and other applicable tax restrictions still determine when the business can use it. A carryforward preserves a potential deduction, not an immediate tax benefit.

Partnerships and their owners

Partnerships generally apply the limitation at the partnership level. Disallowed interest becomes excess business interest expense, or EBIE, allocated to partners.

A partner tracks that amount separately. It generally becomes available when the same partnership later allocates excess taxable income or excess business interest income, subject to partner-level rules.

The IRS partnership return instructions address the partnership's reporting responsibilities.

A multi-member LLC taxed as a partnership follows these partnership rules. Meanwhile, an LLC electing corporate taxation follows its corporate classification. Changing the legal business name doesn't change those federal mechanics.

When You Must File Form 8990

A taxpayer generally files Form 8990 when it has business interest expense subject to Section 163(j), a disallowed business interest carryforward, or relevant partnership EBIE.

A qualifying small-business taxpayer generally doesn't need the form solely for its own current business interest. However, current-year or carried-forward EBIE from a partnership can create a filing obligation despite that exception.

Taxpayers whose interest relates solely to excepted trades or businesses may also qualify for a filing exclusion. Mixed activities require more analysis.

Attach the form to the applicable income tax return. It calculates deductible interest and tracks amounts carried forward. Partners and pass-through shareholders complete applicable supporting schedules before carrying the relevant amounts into Part I.

Filing and deductibility are separate questions. A taxpayer may need to file even when no additional current-year interest is disallowed. Conversely, being exempt from Section 163(j) doesn't make otherwise nondeductible interest deductible.

Records That Support the Interest Deduction

A useful preparation file combines three years of gross receipts, related-entity ownership information, loan statements, and prior-year interest carryforward schedules.

Also retain partnership Schedules K-1 and supporting Section 163(j) disclosures. A lender statement won't show partnership EBIE or identify which partnership must generate the income needed to release it.

Separate principal from interest in the books. Principal repayments don't create an interest deduction. Also document how borrowed funds were used, particularly when a loan funded both business and personal spending.

Interest belongs in your broader review of small business tax deductions, but financing records need their own attention.

These are general federal tax rules, not individualized tax advice. Ownership, elections, and carryforward history can change the treatment of an otherwise similar loan.

Frequently Asked Questions About Form 8990

Does having less than $32 million in sales guarantee an exemption?

No. For tax years beginning in 2026, the test uses average gross receipts over the applicable prior years. Required aggregation and tax-shelter status also matter. Current-year sales alone don't establish eligibility, and partnership EBIE can still trigger filing.

Can disallowed interest be deducted next year?

It generally carries forward, but next year's deduction depends on the applicable rules and available capacity. Partnership EBIE has additional restrictions tied to the partnership that generated it. A carryforward doesn't guarantee a deduction in the immediately following year.

Does Form 8990 replace the QBI deduction forms?

Form 8990 calculates the business interest limitation. Forms 8995 and 8995-A address the qualified business income deduction. These are separate calculations, although changes in deductible business expenses can affect business income used elsewhere on the return.

Make the Exemption Decision Before Claiming Interest

The strongest starting point is a documented gross receipts and ownership analysis . That determines whether the small-business exception applies before you calculate any interest limitation.

Then address tax-shelter status, activity-based exceptions, and entity-specific carryforwards. Keeping those questions separate helps prevent both missed deductions and missed Form 8990 filings.

Our team can help connect the interest calculation with your business return and supporting accounting records.