Form 8990: business interest limitation under section 163(j)

“Use Form 8990 to calculate the amount of business interest expense you can deduct and the amount to carry forward to the next year.” IRS, About Form 8990

Who has to file Form 8990?

Form 8990 is required from any taxpayer with business interest expense, a disallowed business interest expense carryforward, or current or prior-year excess business interest expense, unless an exclusion applies, according to the Instructions for Form 8990 (Rev. December 2025). A pass-through entity allocating excess taxable income or excess business interest income files even without interest expense.

Small business taxpayers are excluded. For tax years beginning in 2025, a taxpayer meets the gross receipts test if its average annual gross receipts for the 3 prior tax years are $31 million or less. It must also not be a tax shelter, and it still files if it has excess business interest expense from a partnership. Gross receipts are aggregated across controlled groups and commonly controlled businesses under section 52.

Interest from excepted trades or businesses, such as an electing real property trade or business, is outside the limit. Form 1120, Schedule K, question 24 asks whether Form 8990 is attached. For pass-through filers, see Form 1120-S and Form 1065.

How is adjusted taxable income figured on Form 8990 for 2025?

Adjusted taxable income (ATI) for 2025 is tentative taxable income with business interest, net operating losses, the section 199A deduction, non-business items and depreciation, amortization and depletion added back or removed, according to the Instructions for Form 8990 (Rev. December 2025). Tentative taxable income on line 6 is taxable income figured as if all current-year business interest expense were deductible, without prior-year carryforwards.

P.L. 119-21, the One Big Beautiful Bill Act, restored the add-back for depreciation, amortization and depletion for tax years beginning after 2024. Form 8990, line 11 was revised to carry that add-back. For tax years beginning in 2022 through 2024, ATI was figured after those deductions.

• Line 7 adds back losses and deductions not allocable to a trade or business
• Line 8 adds back business interest expense not from a pass-through entity
• Line 9 adds back the section 172 NOL deduction
• Line 10 adds back the section 199A deduction
• Line 11 adds back depreciation, amortization and depletion
• Lines 17 and 18 remove non-business income and business interest income

Each add-back or reduction is limited to the amount by which the item affected tentative taxable income. If line 22 is zero or less, ATI is zero. For tax years beginning after 2025, the instructions note that the limit generally reaches capitalized interest and that ATI excludes U.S. shareholder inclusions from controlled foreign corporations.

How does the section 163(j) limit and carryforward work?

The section 163(j) limit caps the business interest expense deduction at business interest income plus 30% of ATI plus floor plan financing interest expense, according to IRC section 163(j)(1) and the Instructions for Form 8990. Part I, Section IV adds the three on line 29, and line 30 allows the smaller of line 29 or line 5.

IRC section 163(j)(2) treats the line 31 excess as business interest paid or accrued in the succeeding tax year, so it moves to next year's line 2 and is tested again. The statute sets no expiration date for it.

A partnership applies the limit at the entity level, but its disallowed amount is allocated to the partners as excess business interest expense instead of carried forward, so line 2 does not apply to it. A partner deducts it later only as the same partnership allocates excess taxable income or excess business interest income. Section 163(j) applies after the basis limits and before the at-risk, passive activity loss and excess business loss limits.

Where does each source document go on Form 8990?

Form 8990 starts from the draft return and a few supporting schedules. The debt schedule and interest ledger supply line 1, last year's Form 8990 supplies line 2, the depreciation schedules supply line 11, and Schedules K-1 from partnerships and S corporations feed Schedules A and B before Part I is completed.

Interest has to be categorized before it reaches line 1. The Instructions for Form 8990 require current-year interest expense to be traced under Temporary Regulations section 1.163-8T into business, investment or personal interest first, and only business interest expense is subject to the limit. An expense that is disallowed, deferred or capitalized in the current year, or not yet accrued, is not taken into account.

The gross receipts test needs its own documents: the gross receipts lines from the 3 prior returns of the taxpayer and every member of its aggregation group. Short years are annualized before averaging, and gross receipts are reduced by returns and allowances.

What does a Form 8990 calculation look like?

For example, a calendar-year C corporation has average annual gross receipts of $48 million for 2022 through 2024, so it is not a small business taxpayer for 2025. It has $3,400,000 of current business interest expense, a $600,000 carryforward from 2024, $1,500,000 of depreciation and amortization, and $50,000 of business interest income. Its tentative taxable income, with all current interest deducted, is $2,100,000.

The corporation deducts $2,135,000 of the $4,000,000 of business interest expense and carries $1,865,000 to its 2026 Form 8990, line 2.

Without the add-back, 30% of the $1,500,000 of depreciation, or $450,000, would be lost from the limit this year. That difference is the practical effect of the P.L. 119-21 change for this corporation, and it shows up directly in the Form 1120 interest deduction and in the size of the carryforward.

What do reviewers check on Form 8990?

A reviewer checking Form 8990 confirms six items, each tied to the Instructions for Form 8990 (Rev. December 2025). The prior-year Form 8990 and the 3 prior years of gross receipts for the whole aggregation group are the first documents to pull, because they decide whether the form applies at all and what line 2 should show this year.

Add-backs on lines 7 through 13 are limited to the amount by which each item affected tentative taxable income, so line 11 takes only the depreciation, amortization and depletion that actually reduced line 6. The deduction on line 30 should match the interest deducted on the return, including the Form 1120 page 1, line 18 figure and the book-to-tax difference on Schedule M-3, Part III, line 8.