Dear [CLIENT NAME]:

The amount of business interest expense that can be deducted for many taxpayers is limited from year to year. Exceptions are made for small taxpayers whose average business gross receipts for the previous three years are less than $31 million in 2025 ($32 million for 2026). However, there are many scenarios where “small taxpayers” will still find themselves subject to the new business interest limitation rules (e.g., if they are considered a “tax shelter”). Additionally, certain real estate and farming businesses have the option to elect out of the new rules (at a cost).

In short, the deduction for business interest expense is limited to the sum of:

• Business interest income;
• 30% of business “adjusted taxable income”; and
• Floor plan financing.

The business interest limitation rules have many complicated nuances, including:

• An expansive definition of business interest expense that encompasses more than the typical bank-type interest expense;
• An expansive definition of “tax shelter” for any flowthrough business (such as a partnership, LLC, or S corporation) if more than 35% of losses during the taxable year are allocated to limited partners or limited entrepreneurs; and
• Special reporting requirements for tracking and carrying over disallowed business interest expense to future tax years.

If you are a business or you are an investor in a partnership, LLC, or S corporation, then we should schedule some time to discuss the business interest limitation rules and how they may affect you. Don’t be fooled by the $31 million threshold for small businesses because even small investors can be blindsided by exceptions.

Sincerely,

Your tax professional