Form 8990: Business Interest Limits, Filers, and Carryforwards

Form 8990 is the IRS form businesses use to calculate the limit on deducting business interest expense under Internal Revenue Code Section 163(j). If your business pays interest on debt and doesn’t qualify for the small business exemption or an excepted-trade election, you almost certainly need to file it. The form runs the arithmetic that decides how much interest you can deduct this year and how much gets pushed into future years.

Who Has to File Form 8990

You generally must file Form 8990 if any of these apply: you have business interest expense for the year, you have a disallowed business interest expense carryforward from a prior year, or you have current or prior-year excess business interest expense allocated to you from a partnership.¹ The requirement applies across entity types: individuals, C corporations, S corporations, and partnerships.

Pass-through entities that allocate excess taxable income or excess business interest income to their owners must also file, even if the entity itself has no interest expense of its own. A U.S. shareholder of a controlled foreign corporation with business interest expense or a disallowed carryforward has to apply Section 163(j) at the CFC level and attach a Form 8990 to each Form 5471.¹

You don’t have to file if you qualify as a small business taxpayer and have no excess business interest expense from a partnership. You’re also off the hook if your only interest expense comes from an excepted trade or business, such as an electing real property trade or business, an electing farming business, a regulated utility, or performing services as an employee.¹

The Small Business Exemption

The cleanest way out of the limitation is the gross receipts test. A business qualifies as a small business taxpayer if its average annual gross receipts for the three prior tax years don’t exceed the inflation-adjusted threshold, which is $31 million for tax years beginning in 2025.² The IRS publishes the updated figure each year in a revenue procedure. A taxpayer meeting this test deducts business interest without limitation and generally doesn’t file Form 8990.

One exclusion cuts against it: the exemption doesn’t apply to tax shelters as defined in Section 448(d)(3). A business classified as a tax shelter is subject to the limitation regardless of size.³

Aggregation Rules for Related Entities

The test isn’t applied entity by entity. Under Section 448(c)(2), businesses under common control must combine their gross receipts when checking the threshold.⁴ These rules exist specifically to stop businesses from splitting into separate entities to stay under the cap.⁵

You must aggregate gross receipts if your businesses fall within a parent-subsidiary controlled group (a common parent owning more than 50% of voting power or stock value of at least one other corporation), a brother-sister controlled group (five or fewer individuals, estates, or trusts owning at least 80% of each corporation), or an affiliated service group under Section 414(m).⁵ An owner running several entities that each gross under $31 million but together exceed it cannot claim the exemption for any of them.

How the Limitation Is Calculated

Your deductible business interest expense for the year cannot exceed the sum of three amounts: business interest income, 30% of adjusted taxable income, and any floor plan financing interest.⁶ Business interest income is interest the business earns. Floor plan financing interest is a narrow category covering interest on loans used to buy motor vehicles, boats, or farm equipment held for sale or lease to customers, where the inventory secures the debt.⁷ Dealers with floor plan financing get that interest deducted in full, outside the 30% constraint.

Interest above the ceiling isn’t lost. It carries forward to the next year, where it’s treated as interest paid that year and runs through the same calculation again.⁶

Adjusted Taxable Income and Recent Changes

The 30% piece turns on adjusted taxable income, or ATI. ATI starts with taxable income and gets modified: you add back business interest expense, any net operating loss deduction, the qualified business income deduction under Section 199A, and certain other items. You subtract business interest income and floor plan financing interest.⁸

The biggest recent change: for tax years beginning after December 31, 2024, the One, Big, Beautiful Bill restored the requirement to add back deductions for depreciation, amortization, and depletion in computing ATI.⁸ Between 2022 and 2024 those deductions weren’t added back, which made ATI lower and the interest cap tighter for capital-intensive businesses. With the add-back restored, ATI will generally be higher and more interest will be deductible.

A second change applies for tax years beginning after December 31, 2025: a U.S. shareholder’s controlled foreign corporation income inclusions under Sections 951(a), 951A(a), and 78 are excluded from ATI.⁸ Multinationals that used CFC income to lift ATI can no longer do so.

Electing Out as an Excepted Trade or Business

Even if you clear the gross receipts threshold, certain businesses can elect out of the limitation entirely. The IRS recognizes four categories of excepted trades or businesses:⁸

Electing real property trade or business: any trade or business involving development, redevelopment, construction, acquisition, conversion, rental, operation, management, leasing, or brokerage of real property.
Electing farming business: any farming business as defined in Section 263A(e)(4).
Regulated utility trade or business: certain businesses furnishing electricity, water, sewage disposal, gas, or steam through local distribution systems or pipeline transportation of gas or steam.
Services as an employee: automatic, no election required.

The first two categories require an affirmative election, and once made, the election is generally irrevocable and binding for all succeeding tax years.⁸ The price is depreciation.

An electing real property trade or business must depreciate nonresidential real property, residential rental property, and qualified improvement property using the Alternative Depreciation System. ADS recovery periods run longer than standard MACRS: 40 years for nonresidential real property and 30 years for residential rental property placed in service after 2017.⁹ This applies retroactively to property placed in service before the election year, as if it had originally been placed in service with the longer recovery period.

An electing farming business must use ADS for any property with a recovery period of 10 years or more. That property is also ineligible for bonus depreciation under Section 168(k).⁸ For capital-intensive operations, slower depreciation can offset or exceed the benefit of unlimited interest deductions. Run the numbers before electing, because you generally can’t undo it.

What Goes on the Form and Where It Attaches

Form 8990 walks through the calculation in sequence. Enter total business interest expense and business interest income for the year. Compute ATI with the modifications above. The form then applies the formula, adding business interest income, 30% of ATI, and any floor plan financing interest to reach the limitation.³

Disallowed business interest expense carryforwards from prior years get reported and added to current-year interest expense before the limitation applies. The form produces two outputs: what you can deduct this year and what carries forward. Attach the completed Form 8990 to your primary income tax return: Form 1120 for C corporations, Form 1065 for partnerships, Form 1120-S for S corporations, or the appropriate individual return.¹⁰

Carryforwards for Interest You Can’t Deduct Now

For C corporations, disallowed business interest expense carries forward indefinitely. The excess is treated as interest paid or accrued in the following tax year and runs through the Section 163(j) calculation again until the business generates enough ATI to absorb it.⁶

Partnerships

Partnerships work differently. Disallowed interest doesn’t carry forward at the partnership level. Instead, the excess is allocated to each partner in proportion to their share of the partnership’s nonseparately stated income or loss.⁶ Each partner’s share appears on Schedule K-1 as excess business interest expense.¹¹

A partner can only deduct allocated excess business interest in a future year when that same partnership allocates excess taxable income to the partner, and only up to the amount of that excess taxable income. Excess taxable income from one partnership can’t unlock excess business interest from a different partnership. The partner’s basis in the partnership interest is reduced by the excess business interest allocated, then increased when the interest is finally deducted or when the partner disposes of the interest.⁶ Partners in multiple partnerships need to track these balances carefully.

S Corporations

S corporations are simpler. Disallowed carryforwards stay at the entity level and are not allocated to shareholders.¹² The S corporation carries the disallowed amount forward and applies the limitation itself in later years. Shareholders don’t track excess business interest expense the way partners do.

Penalty Exposure

Miscalculating the limitation and deducting more interest than allowed can trigger the accuracy-related penalty under Section 6662. The penalty is 20% of the underpayment attributable to negligence, disregard of rules, or a substantial understatement of income tax. The IRS defines negligence broadly as any failure to make a reasonable attempt to comply with the tax code.¹³

The Section 163(j) calculation has enough moving parts that errors are common. The ATI add-backs have changed twice in four years. Partnership allocations require partner-level tracking. Aggregation rules can surprise owners of multiple entities. Keeping clear documentation of your ATI computation, your carryforward balances, and the basis for any election is the practical defense if the IRS questions the return.

1
Internal Revenue Service. Instructions for Form 8990 (12/2025)
2
Internal Revenue Service. Rev. Proc. 2024-40
3
Internal Revenue Service. Instructions for Form 8990
4
Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting
5
Internal Revenue Service. FAQs Regarding the Aggregation Rules Under Section 448(c)(2) That Apply to the Section 163(j) Small Business Exemption
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Office of the Law Revision Counsel. 26 USC 163 – Interest
7
Legal Information Institute. 26 USC 163(j)(9) – Floor Plan Financing Interest Defined
8
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
9
Internal Revenue Service. Publication 946 (2025), How to Depreciate Property
10
Internal Revenue Service. About Form 8990, Limitation on Business Interest Expense Under Section 163(j)
11
Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) (2025)
12
eCFR. 26 CFR 1.163(j)-6 – Application of the Section 163(j) Limitation to Partnerships and Subchapter S Corporations
13
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments