Updated October 16, 2026. Quick answer: Form 8990 is the “Limitation on Business Interest Expense Under Section 163(j)”. “Use Form 8990 to figure the amount of business interest expense you can deduct and the amount to carry forward to the next year.” “A small business taxpayer is not subject to the section 163(j) limitation and is generally not required to file Form 8990.” The form says to “Attach to your tax return.”
S corporation return (Form 1120-S) for 2025, read line by line: Form 1120-S Schedule B questions 6 to 11, Form 1120-S Schedule L and Form 1120-S Schedule M-1.
Partnership return (Form 1065) for 2025, read line by line: Form 1065 Schedule L, Form 1065 Schedule M-1 and Form 1065 Schedule M-2.
What Form 8990 does
The instructions state the computation: “If section 163(j) applies to you, the business interest expense deduction allowed for the tax year is limited to the sum of:”
| Part of the sum | As printed in the instructions |
|---|---|
| 1 | “Business interest income,” |
| 2 | “Applicable percentage of the adjusted taxable income (ATI), and” |
| 3 | “Floor plan financing interest expense.” |
The percentage is fixed in the instructions: “The applicable percentage is 30% (30% ATI limitation).” “Floor plan financing interest expense is not subject to the section 163(j) limitation.”
The disallowed amount moves forward: “The amount of any business interest expense that is not allowed as a deduction under section 163(j) for the tax year is carried forward to the following year as a disallowed business interest expense carryforward.” Owners of rental or small business entities weighing whether the limit reaches them can start with the rental property LLC page.
Key numbers at a glance
The threshold, the percentage and the recovery period that matter most are collected here.
| Item | As printed |
|---|---|
| Gross receipts test | “For tax years beginning in 2025, a taxpayer meets the gross receipts test if the taxpayer has average annual gross receipts of $31 million or less for the 3 prior tax years.” |
| Applicable percentage | “The applicable percentage is 30% (30% ATI limitation).” |
| Electing farming business | “An electing farming business must use the ADS for any farming property the taxpayer owns with a recovery period of 10 years or more.” |
Who must file
“A taxpayer (including, for example, an individual, corporation, partnership, S corporation) with business interest expense; a disallowed business interest expense carryforward; or current year or prior year excess business interest expense must generally file Form 8990, unless an exclusion from filing applies.”
“A pass-through entity allocating excess taxable income or excess business interest income to its owners must file Form 8990, regardless of whether it has any interest expense.”
The exclusions from filing. The first row is the small business exclusion. For the other four rows, the instructions say a taxpayer is also not required to file Form 8990 if it only has interest expense from one or more of these excepted trades or businesses:
| Exclusion | As printed |
|---|---|
| Small business taxpayer | “A taxpayer is not required to file Form 8990 if the taxpayer is a small business taxpayer and does not have excess business interest expense from a partnership.” |
| Employee services | “The trade or business of providing services as an employee,” |
| Real property | “An electing real property trade or business,” |
| Farming | “An electing farming business, or” |
| Utilities | “Certain regulated utility businesses.” |
A pass-through entity that skips the form because it is small can still be asked for data: “the pass-through entity is required, upon request by the partner or shareholder, to provide certain information so that the partner or shareholder can complete their return.”
The small business exception and the gross receipts test
“A small business taxpayer is a taxpayer that is not a tax shelter (as defined in section 448(d)(3)) and meets the gross receipts test, described below.” “A taxpayer that is a tax shelter as defined in section 448(d)(3) is not permitted to use the small business exemptions contained in section 163(j)(3).”
The test for 2025 years: “For tax years beginning in 2025, a taxpayer meets the gross receipts test if the taxpayer has average annual gross receipts of $31 million or less for the 3 prior tax years.”
The average is built this way: “Adding the gross receipts for the 3 prior tax years, and” “Dividing the total by 3.” As a computed illustration, not an IRS example, receipts of $20,000,000 and $30,000,000 and $37,000,000 add to $87,000,000 and $87,000,000 divided by 3 is $29,000,000 which is $31 million or less.
For later years the instructions warn: “For tax years beginning after 2025, see the instructions for your applicable income tax return for the average annual gross receipts test threshold amount for the current tax year.”
Short periods and related businesses are handled by rule: “your gross receipts must be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period.” “all members of a controlled group of corporations (as defined in section 52(a)), and all members of a group of businesses under common control (as defined in section 52(b)), are treated as a single person”. For owners of partnerships and S corporations, “a taxpayer with an ownership interest in a partnership or S corporation must include a share of the partnership’s or S corporation’s gross receipts”.
Small owners deciding on an entity type will find the tax side on the S corporation election calculator page.
The limitation: adjusted taxable income and the 30% cap
“ATI means tentative taxable income of the taxpayer computed without regard to:” “Any business interest income or business interest expense;” “The amount of any net operating loss deduction under section 172;” and the other items the instructions list.
The 2025 change: “P.L. 119-21, commonly known as the One Big Beautiful Bill Act, amended section 163(j) to allow an add-back to taxable income for any deduction allowable for depreciation, amortization, or depletion to determine ATI for tax years beginning after 2024.” “For tax years beginning after 2025, limitations on business interest will generally include capitalized interest except for interest capitalized under sections 263(g) and 263A(f).”
The lines that carry the result:
| Line | What the form and instructions say |
|---|---|
| 26 | “Multiply the ATI from line 22 by the applicable percentage.” |
| 29 | “Total. Add lines 26, 27, and 28” |
| 30 | “A taxpayer subject to the section 163(j) limitation will enter on line 30 the smaller of line 29 or line 5.” |
| 31 | “Subtract line 29 from line 5. If zero or less, enter -0-.” |
Line 5 is described on the form as “Total business interest expense. Add lines 1 through 4”. For a computed illustration, not an IRS example, assume line 22 ATI is $1,000,000 and business interest income is $20,000 and there is no floor plan financing interest and the total of lines 1 through 4 on line 5 is $350,000. Line 26 is $1,000,000 times 30% which is $300,000. Line 29 is $300,000 plus $20,000 which is $320,000. Line 30 is the smaller of $320,000 and $350,000 so it is $320,000. Line 31 is $350,000 minus $320,000 which is $30,000.
Carryforward, partnerships and the schedules
“The amount on line 31 is used on the taxpayer’s next year’s Form 8990, line 2 (except for partnerships).” “Enter the prior year disallowed business interest expense carryover.” “Line 2 does not apply to partnerships.”
Ordering matters: “Current year business interest expense is deducted before disallowed business interest expense carryforwards, which are then deducted in the order of the year in which they were incurred, starting with the earliest year, subject to certain limitations.”
For partnerships: “If a partnership has a limitation on business interest expense, the disallowed business interest expense is not carried over by the partnership, but is allocated to the partners.” “This interest is referred to as excess business interest expense.” Partners will see it on their Schedule K-1; see the Schedule K-1 (Form 1065) page.
The form parts:
| Part | Who completes it, as printed |
|---|---|
| Part I | “Part I is completed by all taxpayers subject to section 163(j).” |
| Part II | “Part II is only completed by a partnership that is subject to section 163(j).” |
| Part III | “Part III is only completed by S corporations that are subject to section 163(j).” |
“Any taxpayer that is required to complete Part I and is a partner in a partnership that is subject to the section 163(j) limitation must complete Schedule A before completing Part I.” “Any taxpayer that is required to complete Part I and is a shareholder in an S corporation that is subject to the section 163(j) limitation must complete Schedule B before completing Part I.”
Elections out of the limit
“A taxpayer engaged in a real property trade or business, a farming business, or a non-automatically excepted regulated utility trade or business may elect not to limit business interest expense under section 163(j) for such trade or business.” “This is an irrevocable election.”
The cost of the election: “An electing real property trade or business must use the ADS for any nonresidential real property, residential rental property, and qualified improvement property used in its trade or business.” The edition read for this page is Form 8990 and its instructions, both Rev. December 2025, which are the revisions irs.gov served when they were read on 2026-10-16. Check the revision printed on the form you are filing, because the gross receipts threshold and the adjusted taxable income lines can change from one tax year to the next.
Common mistakes
- Treating the small business exclusion as automatic. The instructions tie it to the gross receipts test and to not being a tax shelter, and the filing exclusion also requires no excess business interest expense from a partnership.
- Using the 2025 receipts threshold for a later year. The instructions say that for tax years beginning after 2025 the threshold comes from the applicable income tax return instructions.
- Carrying a partnership’s disallowed interest on the partnership’s own line 2. The instructions say line 2 does not apply to partnerships because the disallowed amount is allocated to the partners as excess business interest expense.
Related: rental property LLC, S corporation election calculator, Schedule K-1 (Form 1065) boxes, deductions for a tiny business, and QBI deduction thresholds.
Sources
- Form 8990 (Rev. December 2025), Limitation on Business Interest Expense Under Section 163(j): https://www.irs.gov/pub/irs-pdf/f8990.pdf
- Instructions for Form 8990 (Rev. December 2025): https://www.irs.gov/pub/irs-pdf/i8990.pdf
Read from the IRS documents linked above on October 16, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.