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Bigger interest deductions may be available for your business

If your business has loans — whether for equipment, vehicles, real estate, or operating expenses — you’re probably deducting the interest you pay. That’s a good thing. Business interest is generally tax-deductible.

However, there are limits on how much you can deduct each year. A new law (the OBBBA) changes how limits work for taxable years beginning in 2025 and beyond, and in many cases, it allows for larger deductions. Here’s what that means for you.

The basic rule (before the recent change)

Under existing tax law, your business interest deduction is generally limited to: 30% of your adjusted taxable income (ATI)

If your interest expense is higher than that limit:

• You don’t lose the deduction.

• The excess carries forward to future years.

This rule can apply to:

• Sole proprietors

• Partnerships

• LLCs

• S corporations

• C corporations

For pass-through businesses (like partnerships and S corporations), the calculation can be more complex because the limitation may apply at both the business and owner levels.

What changed under the new law?

A broader definition of income

For taxable years beginning in 2025 and beyond, adjusted taxable income (ATI) is calculated before subtracting depreciation and amortization.

In simple terms: Your income number is higher for purposes of this limitation.

A higher ATI means:

• A higher 30% limit

• A larger allowable interest deduction

This brings the calculation closer to EBITDA (earnings before interest, taxes, depreciation, and amortization) — a number many business owners already recognize from their financial statements.

For businesses with significant loans, this can translate into meaningful tax savings.

Expanded floor plan financing rules

For taxable years beginning in 2025 and beyond, the definition of “floor plan financing” has been expanded to include financing for:

• Trailers

• Campers

• Recreational units designed for temporary living

If your business sells or finances these types of products, this change may increase your allowable interest deduction.

Are small businesses exempt?

Yes — many smaller businesses are completely exempt from this limitation.

For taxable years beginning in 2025:

• If your average annual gross receipts for the prior three years are $31 million or less, the limitation generally does not apply.

For taxable years beginning in 2026:

• The threshold increases to $32 million.

If your business falls under these thresholds, this rule likely doesn’t limit your interest deduction at all.

Other businesses that may be exempt

Certain businesses can elect out of the limitation, including:

• Real property businesses (such as rental real estate operators)

• Farming businesses

• Certain regulated utilities

However, electing out typically requires using longer depreciation schedules — meaning you deduct property more slowly.

This creates a trade-off: Larger interest deductions now vs. Slower depreciation deductions over time

Your Padgett advisor can help you evaluate which approach makes the most sense based on your goals, growth plans, and cash flow.

What should you do now?

If your business:

• Carries significant debt

• Is planning to finance equipment or property

• Is growing and taking on loans

• Operates in real estate, farming, or product financing

This is worth reviewing.

The interest limitation rules are complex — especially for partnerships and S corporations — but they also create planning opportunities.

Your Padgett advisor can:

• Review your current debt structure

• Estimate how the updated rules affect your deductions

• Help you make financing decisions with tax impact in mind

If you’re unsure whether this applies to your business, reach out to your local Padgett office. We’re here to help you make informed decisions year-round — not just at tax time.

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