Form 8990: Business Interest Limits, Filers, and Carryforwards

Form 8990 is the IRS form you use to calculate how much of your business interest expense you can deduct in a given year under the Section 163(j) limitation. If your business pays interest on debt and your average annual gross receipts for the three prior years exceed $31 million (the threshold for tax years beginning in 2025), you almost certainly need to file it. Get the calculation wrong and you either leave deductions on the table or face a 20% accuracy-related penalty for claiming too much.

What the Deduction Limit Actually Is

Your deductible business interest expense for the year cannot exceed the sum of three things: your business interest income, 30% of your adjusted taxable income (ATI), and any floor plan financing interest.¹ Business interest income is interest your business earns. Floor plan financing interest is a narrower category covering interest on loans used to buy motor vehicles, boats, or farm equipment held for sale or lease, where the inventory secures the debt.² Dealers with floor plan financing get that interest deducted in full, outside the 30% constraint.

Anything above the ceiling is disallowed for the current year. It doesn’t disappear; it carries forward and gets treated as interest paid in the following year, running through the same calculation again.¹

Who Has to File Form 8990

You generally must file Form 8990 if you have any business interest expense, a disallowed interest expense carryforward from a prior year, or current or prior year excess business interest expense from a partnership.³ The requirement reaches individuals, C corporations, S corporations, and partnerships.

Pass-through entities that allocate excess taxable income or excess business interest income to their owners must file Form 8990 as well, 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 must apply Section 163(j) at the CFC level and attach a Form 8990 to each Form 5471.³

You’re off the hook if you qualify as a small business taxpayer and have no excess business interest expense from a partnership, or if your only interest expense comes from an excepted trade or business.³

The Small Business Taxpayer Exemption

The most common way to sidestep Section 163(j) entirely is the gross receipts test. A business qualifies if its average annual gross receipts for the three prior tax years don’t exceed the inflation-adjusted threshold: $31 million for tax years beginning in 2025.⁴ The IRS publishes an updated figure each year. Meet the test, and you can deduct business interest without limit and skip Form 8990 altogether.

One carve-out: 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 gross receipts.⁵

Aggregation Rules for Related Entities

The gross receipts test isn’t applied entity by entity. Under Section 448(c)(2), businesses under common control must combine their gross receipts to determine whether they clear the threshold.⁶ The IRS designed these rules specifically to stop owners from splitting operations across multiple entities to stay below the limit.⁷

You must aggregate if your businesses fall within a parent-subsidiary controlled group (common parent owning more than 50% of voting power or stock value), a brother-sister controlled group (five or fewer individuals, estates, or trusts owning at least 80%), or an affiliated service group under Section 414(m).⁷ If your several entities each gross under $31 million but together exceed it, none of them qualify.

Electing Out as an Excepted Trade or Business

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

An electing real property trade or business, covering development, construction, acquisition, rental, operation, management, leasing, or brokerage of real property.
An electing farming business as defined in Section 263A(e)(4).
A regulated utility business furnishing electricity, water, sewage, gas, or steam.
The trade or business of performing services as an employee, which is automatic and requires no election.

The first two require an affirmative election, and once made, it’s generally irrevocable and binding for every year that follows.⁸ The price of admission is giving up accelerated 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). ADS recovery periods are 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.

An electing farming business must use ADS for any property with a recovery period of 10 years or more, and that property is ineligible for bonus depreciation under Section 168(k).⁸ For capital-intensive farms, slower depreciation can wipe out the benefit of unlimited interest deductions. Run the math on your specific situation first, because you can’t undo the election later.

Calculating Adjusted Taxable Income

ATI drives the 30% piece of the limit, and it has moved around more than once in recent years. You start with taxable income, then add back business interest expense, any net operating loss deduction, the Section 199A qualified business income deduction, and certain other items. You subtract business interest income and floor plan financing interest.⁸

Two recent changes matter. For tax years beginning after December 31, 2024, the One, Big, Beautiful Bill restored the requirement to add back depreciation, amortization, and depletion when calculating ATI.⁸ From 2022 through 2024, those add-backs were gone, which pushed ATI down and tightened the limitation for capital-intensive businesses. With the add-back restored, ATI will generally be higher and interest deductions larger. If you structured financing around the stricter 2022–2024 rules, the math has shifted back in your favor.

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 the ATI computation.⁸ Multinationals that previously used CFC income to boost ATI can’t do that anymore.

What Happens to Disallowed Interest

Disallowed business interest expense carries forward indefinitely for C corporations. Each year, the excess is treated as interest paid in the following year and runs through the Section 163(j) calculation again, waiting for the business to generate enough ATI to absorb it.¹ In a year of soft revenue and steady debt service, carryforwards can pile up fast.

Partnerships

Partnership carryforwards work differently. When a partnership has disallowed interest, the excess doesn’t carry forward at the entity level. It gets allocated to each partner in proportion to their share of the partnership’s nonseparately stated income or loss.¹ Each partner’s share shows up on Schedule K-1 as excess business interest expense.¹⁰

A partner can only deduct that allocated excess in a later year when the same partnership allocates excess taxable income to that partner, and only up to the amount of the excess taxable income. Excess taxable income from one partnership cannot be used to free up disallowed interest from a different one. The partner’s basis in the partnership interest is reduced by the amount of excess business interest allocated, and that basis is restored when the interest is eventually deducted or when the partner disposes of the interest.¹ Partners in multiple partnerships have real tracking work on their hands.

S Corporations

S corporations are simpler. Disallowed business interest expense carryforwards stay at the entity level and are not allocated out to shareholders.¹¹ The S corporation applies the limitation itself each year, and shareholders don’t need to carry a separate running balance.

Ownership Changes Can Trap Your Carryforwards

If a corporation with disallowed interest carryforwards undergoes a significant ownership change, Section 382 caps how quickly those carryforwards can be used. An ownership change occurs when shareholders holding 5% or more of the stock increase their combined ownership by more than 50 percentage points over a three-year period.¹²

Section 382 explicitly treats disallowed Section 163(j) carryforwards as pre-change losses subject to the annual limitation.¹² The annual cap equals the corporation’s stock value immediately before the change multiplied by the long-term tax-exempt rate. For a company sitting on years of disallowed interest with a depressed stock value, an ownership change can render those carryforwards nearly worthless. The point often gets missed in M&A planning.

Penalties for Getting It Wrong

If you miscalculate the limitation and deduct more than the law allows, the resulting underpayment can trigger the accuracy-related penalty under Section 6662. That’s 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

Section 163(j) has enough moving parts to make errors routine. The ATI add-backs have changed twice in four years. Partnership allocations require partner-level tracking across multiple entities. Aggregation rules catch owners who assumed each business stood on its own. Keep clear documentation of your ATI calculation, your carryforward balances, and your basis for any excepted-trade elections. That paper trail is what will carry you through an IRS question.

1
Office of the Law Revision Counsel. 26 USC 163 – Interest
2
Legal Information Institute. 26 USC 163(j)(9) – Floor Plan Financing Interest Defined
3
Internal Revenue Service. Instructions for Form 8990 (12/2025)
4
Internal Revenue Service. Rev. Proc. 2024-40
5
Internal Revenue Service. Instructions for Form 8990
6
Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting
7
Internal Revenue Service. FAQs Regarding the Aggregation Rules Under Section 448(c)(2) That Apply to the Section 163(j) Small Business Exemption
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. Partners Instructions for Schedule K-1 (Form 1065) (2025)
11
eCFR. 26 CFR 1.163(j)-6 – Application of the Section 163(j) Limitation to Partnerships and Subchapter S Corporations
12
Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change
13
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments