This AIM Financial article covers IRS Form 8990, which businesses use to calculate and report limitations on business interest expense under Section 163(j). It explains how the rules may affect partnerships, corporations, and other businesses, with practical guidance for West Michigan business owners.

Business owners often borrow money to purchase equipment, finance expansion, acquire property, or cover operating expenses. The interest paid on business loans may be deductible, but federal tax law can limit how much interest a business may deduct in a particular year.

IRS Form 8990, Limitation on Business Interest Expense Under Section 163(j), helps eligible taxpayers calculate their allowable business interest deduction and determine whether some interest expense must be carried forward to a future tax year.

For small businesses, real estate investors, partnerships, and corporations in Grand Rapids, Kentwood, Wyoming, Middleville, and throughout West Michigan, understanding Form 8990 can help with tax planning and cash-flow management. AIM Financial helps individuals and businesses understand federal tax reporting requirements and prepare accurate income tax returns.

What Is IRS Form 8990?

Form 8990 is used to calculate the amount of business interest expense a taxpayer may deduct under Internal Revenue Code Section 163(j).

In general, the business interest deduction for a taxpayer subject to this limitation cannot exceed the total of three components:

• The taxpayer’s business interest income.
• Thirty percent of adjusted taxable income, or ATI, subject to the applicable rules.
• Certain floor plan financing interest expense.

The calculation can be more complicated when a business owns interests in partnerships, has interest expense carried forward from earlier years, or qualifies for a special exception.

If the business pays more interest than it is permitted to deduct, the disallowed amount may generally be carried forward. Special rules apply to partnerships and the partners who receive excess business interest expense allocations.

The purpose of Form 8990 is to document these calculations and help determine the allowable deduction for the relevant tax year.

You can find the official form on the IRS About Form 8990 webpage.

Who May Need to File Form 8990?

Form 8990 may apply to individuals, corporations, partnerships, S corporations, and certain other taxpayers with business interest expense or related carryforward amounts.

A taxpayer generally must consider filing Form 8990 if the taxpayer has:

• Business interest expense for the current year.
• Disallowed business interest expense carried forward from an earlier year.
• Excess business interest expense allocated from a partnership.
• Certain excess business interest income or excess taxable income reporting requirements.

However, not every business must file the form.

Some small business taxpayers are excluded from the Section 163(j) limitation if they meet the applicable gross receipts test and are not treated as tax shelters. Certain excepted trades or businesses may also qualify for an exception.

Because these rules depend on business structure, income, ownership relationships, and other circumstances, a business should not assume that Form 8990 is required—or unnecessary—without checking the applicable IRS instructions.

What Is the Small Business Exception?

One important feature of Section 163(j) is the small business exception.

Generally, a taxpayer may qualify if it is not a tax shelter and its average annual gross receipts for the three preceding tax years do not exceed the applicable threshold.

For tax years beginning in 2025, the IRS instructions identify a gross receipts threshold of $31 million. The threshold can change with inflation, so businesses filing for other tax years should verify the amount applicable to that year.

Gross receipts generally must be evaluated using specific tax rules. Businesses under common control or otherwise treated as a single taxpayer may need to combine receipts when testing eligibility.

A business that appears small when considered on its own may not qualify if it must aggregate its receipts with related businesses. In addition, certain tax shelters cannot use the small business exception even if their gross receipts are below the threshold.

For small business owners in West Michigan, determining eligibility early can help avoid unnecessary calculations and identify the correct tax treatment.

How Is Adjusted Taxable Income Calculated?

Adjusted taxable income, or ATI, is a key component of the Section 163(j) limitation.

In simplified terms, ATI starts with a specially calculated taxable income amount and applies adjustments specified by tax law. It is not necessarily the same as the business’s accounting profit or the taxable income shown on its financial statements.

For tax years beginning after 2024, legislation enacted in 2025 changed the ATI calculation by restoring an adjustment for allowable depreciation, amortization, and depletion deductions. This change can affect the amount of interest expense certain businesses are permitted to deduct.

Other rules may affect ATI, including partnership allocations and certain international tax items.

Because the calculation is tax-year specific, a business should use the correct version of Form 8990 and the corresponding instructions. Using an outdated calculation method may produce an incorrect interest deduction.

What Happens When Business Interest Is Not Fully Deductible?

Suppose a business pays $100,000 in business interest during a tax year. After applying the relevant Section 163(j) calculation, assume the business is allowed to deduct only $70,000.

The remaining $30,000 may generally be carried forward as disallowed business interest expense, subject to the applicable rules.

This example is illustrative only. The actual limitation depends on the taxpayer’s business interest income, ATI, floor plan financing interest, carryforwards, and any applicable exceptions.

A carryforward does not necessarily mean the business will lose the deduction permanently. It means the expense may need to be considered in a future year when determining the allowable deduction.

However, partnership rules can differ from the rules that apply to other business structures. A partner who receives excess business interest expense from a partnership may have to track the amount separately and follow additional restrictions before deducting it.

Maintaining accurate records of current-year interest and prior-year carryforwards is therefore essential.

Special Rules for Real Estate and Farming Businesses

Certain taxpayers may elect to treat eligible activities as excepted trades or businesses under Section 163(j).

For example, an eligible real property trade or business may elect out of the interest limitation. An eligible farming business may also make an election, subject to applicable requirements.

These elections can have important consequences. A real property or farming business that elects out generally must use the alternative depreciation system for certain property, which may affect depreciation deductions.

The decision should therefore involve more than comparing the current year’s interest expense with the limitation. Business owners should consider the longer-term impact on depreciation, taxable income, and future deductions.

Certain regulated utility businesses may also qualify for exceptions under the applicable rules.

A tax professional can help evaluate whether an election is available and whether it makes sense for the business.

Common Form 8990 Mistakes to Avoid

Businesses can run into problems when they overlook the technical requirements of Section 163(j).

Common mistakes include:

• Assuming every business loan interest payment is automatically deductible in full.
• Using an outdated ATI calculation.
• Failing to evaluate the small business gross receipts test.
• Ignoring tax shelter restrictions or business aggregation rules.
• Forgetting to track disallowed interest carried forward from previous years.
• Overlooking excess business interest expense reported on a Schedule K-1.
• Making a real property or farming election without reviewing the depreciation consequences.

Keeping loan statements, interest expense records, prior-year tax returns, and partnership tax documents organized can make Form 8990 preparation more accurate.

How AIM Financial Can Help With Business Interest Deductions

Business interest expense rules can affect a company’s taxable income, deductions, and financial planning. These calculations may be especially challenging for businesses with multiple entities, real estate holdings, partnership investments, or significant borrowing.

AIM Financial helps individuals and businesses with federal income tax preparation and related reporting requirements. Whether you operate a small business, own rental or commercial property, or receive partnership income, professional assistance can help you understand which rules apply and what records you need.

If your business is located in Grand Rapids, Kentwood, Wyoming, Middleville, or elsewhere in West Michigan, contact AIM Financial to discuss your business tax preparation needs.

Do not overlook a potential limitation on your business interest deduction. Contact AIM Financial for help preparing your federal income tax return and understanding the tax rules that may affect your business.

Disclaimer: This article provides general educational information and is not individualized tax or legal advice. Section 163(j) calculations and exceptions depend on the tax year, business structure, and applicable tax rules. Consult the current IRS Form 8990 instructions or a qualified tax professional for guidance.