Form 8990 Instructions: Adjusted Taxable Income and Carryforwards

Form 8990 is where you calculate how much of your business interest expense you can deduct this year under the Section 163(j) limitation and how much rolls forward. The instructions for Form 8990 walk you through three parts and two schedules, but the order you work them in depends on your entity type. Partners and S corporation shareholders start on Schedule A or B; everyone else starts in Part I. This guide follows the form in that working order and flags the 2025 change that materially increases deductible interest for asset-heavy businesses.

Who Has to File

Attach Form 8990 to your return if you have business interest expense subject to the Section 163(j) limitation, a disallowed business interest expense carryforward from a prior year, or you’re a pass-through entity allocating excess items to your owners.¹

“Business interest” here means interest on debt properly allocable to a trade or business. Investment interest is governed separately under Section 163(d) and does not belong on Form 8990.²

Before You Start: Can You Skip the Form Entirely?

Two exits keep you out of the limitation altogether.

The first is the small business exemption. For tax years beginning in 2026, you qualify if your average annual gross receipts for the three prior tax years do not exceed $32 million. The threshold adjusts annually for inflation.³ The exemption does not apply to tax shelters as defined in Section 448(d)(3), regardless of receipts.⁴

The second is an elective opt-out available to real property trades or businesses and farming businesses.⁵ The price is depreciation. A real property electing business must depreciate nonresidential real property, residential rental property, and qualified improvement property under the Alternative Depreciation System, and those assets lose eligibility for bonus depreciation under Section 168(k).³ ADS recovery periods run longer than standard MACRS, so you’re swapping unlimited interest deductions for slower cost recovery. The election is attached to a timely filed original return, including extensions, and once made cannot be revoked.

How the Form Is Structured and the Order to Complete It

Form 8990 has three parts and two schedules. The workflow matters: Schedules A and B feed into Part I, so partners and S corporation shareholders complete those first.⁶

Part I is the core calculation, split into four sections: total business interest expense (I), Adjusted Taxable Income (II), business interest income (III), and the final limitation and carryforward (IV).
Part II is completed only by partnerships subject to the limitation. It calculates the excess items allocated to partners.
Part III is the S corporation version, reporting excess taxable income and excess business interest income allocated to shareholders.
Schedule A summarizes excess items you were allocated as a partner from all partnerships you hold an interest in. Complete it before Part I.
Schedule B is the shareholder equivalent for S corporation allocations. Complete it before Part I.

Calculating Adjusted Taxable Income

ATI drives the whole limitation. Multiply it by 30% and you have the main component of your deductible interest. Most of the work on Form 8990 lives here.

Start with tentative taxable income, which is your regular taxable income computed without applying the Section 163(j) limitation. Then adjust: add back business interest expense, subtract business interest income, add back any net operating loss deduction, and add back any qualified business income deduction under Section 199A.²

The Depreciation Add-Back Is Back for 2025

For tax years beginning after December 31, 2024, the One, Big, Beautiful Bill restored the add-back of depreciation, amortization, and depletion when computing ATI. That returns ATI to the more generous EBITDA-like figure it was through 2021, after three years (2022 through 2024) in which those deductions were not added back.⁷ If your business carries meaningful depreciable assets, expect a substantially higher ATI and a larger deductible interest amount than you had on your 2022 through 2024 returns.

Entity-Level Rules

C corporations compute ATI at the entity level from corporate taxable income. Partnerships and S corporations also compute ATI at the entity level but exclude items not properly allocable to a trade or business. The statute requires further adjustments for Subpart F and GILTI inclusions and for the related deductions under Sections 245A and 250.²

Applying the Limitation

The maximum business interest expense you can deduct for the year is the sum of three amounts:

Business interest income includible in your gross income and allocable to a trade or business. This offsets business interest expense dollar for dollar.
30% of ATI. The core cap, and the number that grew for 2025 with the depreciation add-back restored.
Floor plan financing interest. Interest on debt used to finance motor vehicles held for sale or lease and secured by that inventory. Fully deductible; it does not count against the 30% cap.

Add the three on Section IV of Part I and compare the total to your actual business interest expense for the year, including any prior-year carryforward.² If your interest is at or below the cap, you deduct it all. Anything over the cap is disallowed for the year and carries forward. Current-year interest is deducted before carryforward amounts, so any remaining room absorbs the oldest suspended interest first.

Partnerships: Part II and What Partners Receive

Partnerships apply the limitation at the entity level using the partnership’s own ATI, not the partners’ figures. The partnership determines how much of its interest is deductible and allocates the consequences on Schedule K-1.⁸

Two items flow out to partners:

Excess Taxable Income (ETI) is the share of partnership ATI not needed to support the entity-level deduction. When you receive ETI, it increases your own ATI for deducting interest from other sources.
Excess Business Interest Expense (EBIE) is the interest disallowed at the partnership level. It suspends at the partner level and can only be deducted in a later year when that same partnership allocates you enough ETI to absorb it.

Watch the basis mechanic. When EBIE is allocated to you, your basis in the partnership interest drops by that amount immediately.⁸ You recover the basis when you eventually deduct the suspended interest, but the reduction affects gain on sale and the treatment of distributions in the interim. As a partner receiving these items, report them on Schedule A before you touch Part I.

S Corporations: Part III and Why Shareholders Get Off Easier

S corporations also apply the limitation at the entity level, but the allocation rule differs in one significant way. An S corporation allocates ETI and excess business interest income to shareholders, but it does not allocate EBIE. Disallowed interest stays with the corporation and carries forward at the entity level until the corporation’s own future limitation permits a deduction.⁶

Shareholders don’t carry the suspended-interest bookkeeping that partners do. The trade-off is that they can’t personally accelerate the deduction either. It waits on corporate income.

Carryforwards

Disallowed business interest expense is treated as business interest paid or accrued in the following tax year.² Because the roll is automatic and the statute imposes no expiration, the carryforward can run indefinitely. Each year you add the prior year’s disallowed amount to current-year interest in Section I of Part I, then apply the formula to the combined total.

For partnerships, remember that disallowed interest is tracked at the partner level as EBIE, not on the partnership’s own books. The partnership reports each partner’s share on Schedule K-1, and the partner keeps the running total from year to year.³

Ownership Changes Can Kill the Carryforward

Section 382 treats disallowed business interest expense carryforwards as “pre-change losses,” subjecting them to the same annual cap that limits NOL carryforwards after an ownership change. The annual cap equals the value of the old corporation multiplied by the long-term tax-exempt rate. If the new owners do not continue the old business enterprise for at least two years after the change, the limitation drops to zero and the carryforwards are effectively lost.⁹ If a deal turns partly on inherited interest carryforwards, run the Section 382 math before assuming they’ll be there at face value.

1
Internal Revenue Service. About Form 8990, Limitation on Business Interest Expense Under Section 163(j)
2
Office of the Law Revision Counsel. 26 USC 163 – Interest
3
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
4
Office of the Law Revision Counsel. 26 US Code 448 – Limitation on Use of Cash Method of Accounting
5
eCFR. 26 CFR 1.163(j)-9 – Elections for Excepted Trades or Businesses; Safe Harbor for Certain REITs
6
Internal Revenue Service. Instructions for Form 8990 (12/2025)
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Internal Revenue Service. IRS Updates Frequently Asked Questions on Changes to the Limitation on the Deduction for Business Interest Expense
8
eCFR. 26 CFR 1.163(j)-6 – Application of the Section 163(j) Limitation to Partnerships and Subchapter S Corporations
9
Office of the Law Revision Counsel. 26 US Code 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change