How to Calculate Excess Taxable Income on Form 8990

To calculate excess taxable income on Form 8990, multiply the partnership’s or S corporation’s adjusted taxable income by a ratio: the unused portion of the 30% ATI cap divided by the full 30% cap. Written out, ETI = ATI × [(30% of ATI) − (BIE − floor plan financing − BII)] ÷ (30% of ATI).¹ The number only matters for pass-throughs, because ETI is what a partnership or S corporation allocates to its owners so those owners can deduct their own business interest.

Three inputs feed the formula: ATI, business interest expense net of business interest income and floor plan financing, and the 30% cap itself. Get ATI right and the rest is arithmetic.

Step 1: Build Adjusted Taxable Income

ATI is not taxable income. You start with taxable income and strip out items that would distort the interest calculation, so the result reflects core operating performance.² The adjustments happen in Part I of Form 8990.

Add back to taxable income:

Business interest expense, so the interest deduction can’t shrink the base that determines its own limit.
Any net operating loss deduction claimed under Section 172.
The Section 199A qualified business income deduction. Because QBI reduced taxable income, removing it from the ATI base means adding it back. This trips people up.³
Depreciation, amortization, and depletion, for tax years beginning after 2024. The One Big Beautiful Bill Act reinstated this add-back after it had been suspended for 2022 through 2024.⁴
Capital loss carrybacks and carryovers, on Line 13.⁴

Subtract from taxable income:

Business interest income. It already increased taxable income, and the ATI concept computes the base “without regard to” it.
Items of income, gain, deduction, or loss not properly allocable to a trade or business.²

For tax years beginning after 2025, ATI also excludes CFC income inclusions under Sections 78, 951(a), and 951A, along with the corresponding deductions under Sections 245A(a) and 250(a)(1)(B).² Businesses with meaningful CFC inclusions will see ATI drop in 2026 relative to prior years.

Step 2: Find the Unused 30% Capacity

The interest limitation ceiling equals business interest income plus 30% of ATI plus floor plan financing interest.² Business interest expense first offsets business interest income and floor plan financing dollar for dollar; only the leftover BIE gets tested against the 30% of ATI cap.

The formula’s numerator is that net amount subtracted from the 30% cap:

(30% of ATI) − (BIE − floor plan financing − BII)

If net BIE is less than 30% of ATI, the leftover is unused capacity and generates ETI. If net BIE equals or exceeds 30% of ATI, unused capacity is zero, ETI is zero, and the entity has disallowed interest instead.

Step 3: Apply the Ratio

ETI bears the same proportion to ATI that unused capacity bears to the full 30% cap. So:

ETI = ATI × [unused capacity ÷ (30% of ATI)]

A worked example makes the mechanics concrete. A partnership has $1,000,000 in ATI, $250,000 in BIE, $50,000 in BII, and no floor plan financing. The limitation is $50,000 + $300,000 = $350,000, so all $250,000 of BIE is deductible.

Net BIE relying on the 30% cap is $250,000 − $50,000 = $200,000. Unused capacity is $300,000 − $200,000 = $100,000. Applying the formula:

ETI = $1,000,000 × $100,000 ÷ $300,000 = $333,333

The design of the ratio is intentional. A partner receiving half of that ETI ($166,667) picks up exactly $50,000 of additional 30% capacity at their own level ($166,667 × 30%), which mirrors the partnership’s unused capacity attributable to that partner.²

How the ETI Gets Allocated and Used

ETI is not a deduction for the entity. It’s a number the entity computes and pushes out to its owners, and what happens next depends on the entity type.

Partnerships

A partnership allocates ETI to partners based on their distributive shares of the partnership’s nonseparately stated taxable income or loss.² A partner adds their share to their own ATI, expanding their personal 30% capacity for interest deductions.

There’s a priority rule that catches people off guard. If the partnership has previously allocated the partner excess business interest expense (reported on Schedule K-1, Box 13, Code K),⁵ the current-year ETI from that same partnership must first absorb the outstanding EBIE before any of it can support other interest deductions the partner has. EBIE is treated as business interest paid in the year the partner receives enough ETI to support it, and only up to the amount of that ETI.²

S Corporations

An S corporation also computes and allocates ETI to shareholders, who add it to their personal ATI just as partners do.⁴ The important difference: disallowed interest at the S corporation level stays with the corporation as a carryforward. It never gets pushed to shareholders as EBIE.⁶ So the ETI calculation runs identically, but there is no EBIE tracking to worry about at the shareholder level.

When Excess Taxable Income Is Zero

ETI can be zero, and it often is. If net BIE (BIE minus BII minus floor plan financing) equals or exceeds 30% of ATI, the numerator in the formula is zero or negative, and ETI is zero. In that case the entity has disallowed business interest instead: EBIE allocated to partners at a partnership, or a carryforward retained at an S corporation.

A common misconception is that any positive ATI generates some ETI. It doesn’t. ETI exists only when the 30% cap has room left over after net BIE has been absorbed.

A Filing Note for Pass-Throughs With No Interest

A partnership or S corporation that carries no debt can still be required to file Form 8990 if it allocates ETI or excess business interest income to its owners.⁴ Assuming the form doesn’t apply because there was no interest expense is a mistake. If the entity generates ETI for its owners, it files.

Keeping the Calculation Defensible

Errors in the ATI adjustments and in the ETI ratio itself are among the more common problems on Form 8990, and they cascade: a wrong ETI at the entity flows into every K-1 and every partner’s return. The reinstated depreciation add-back for tax years beginning after 2024, the QBI add-back direction, and the ordering rule that forces ETI to absorb outstanding EBIE from the same partnership before doing anything else are the three places worth double-checking. Section 6662 imposes a 20% accuracy-related penalty on underpayments attributable to negligence or substantial understatement,⁷ and clean documentation of each ATI adjustment is the practical defense if the numbers are ever questioned.

1
Legal Information Institute. Excess Taxable Income – 26 USC 163(j)(4)
2
Office of the Law Revision Counsel. 26 USC 163 – Interest
3
Internal Revenue Service. Instructions for Form 8990
4
Internal Revenue Service. Instructions for Form 8990 – Limitation on Business Interest Expense Under Section 163(j)
5
Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
6
eCFR. 26 CFR 1.163(j)-6 – Application of the Section 163(j) Limitation to Partnerships and Subchapter S Corporations
7
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments