On a multi-step income statement, interest expense goes in the non-operating section, on the line directly below operating income (EBIT). Subtracting it from operating income produces pre-tax income, which is then reduced by income taxes to arrive at net income. That placement is deliberate: it separates the cost of borrowing from the cost of running the business, so anyone reading the statement can see how much profit the core operations produced before financing decisions entered the picture.
The Exact Line Placement
A multi-step income statement builds profitability in layers. Revenue minus cost of goods sold gives gross profit. Operating expenses such as rent, salaries, and marketing come out next, leaving operating income, also called Earnings Before Interest and Taxes (EBIT).
Interest expense sits on the very next line, below EBIT, in the non-operating section. The subtotal after subtracting it is pre-tax income, sometimes labeled Earnings Before Tax (EBT). Federal and state income taxes are calculated on that pre-tax figure, and what remains is net income, the bottom-line amount available to shareholders.
Why It Sits Below Operating Income
For most companies, interest expense reflects a financing decision, not an operating activity. A manufacturer’s operating costs cover raw materials, factory labor, and shipping. Interest, by contrast, depends on how much the company chose to borrow and at what rate. Two firms with identical products and sales can report very different interest figures simply because one carries more debt.
Keeping interest out of the operating section makes comparisons across companies and industries cleaner. When profits fall, the layered format shows whether the cause was weaker sales or heavier debt service. Analysts use the same distinction when they want to judge the health of core operations independent of capital structure.
The Bank Exception
Banks and other financial institutions handle this differently. Their core business is borrowing (through deposits and wholesale funding) and lending at a higher rate, so interest expense is directly tied to how they earn revenue. On a bank’s income statement, interest expense appears in the operating section, and the first key metric shown is net interest income: interest earned on loans minus interest paid on deposits and borrowings.
What the Interest Expense Line Includes
The line is rarely a single loan’s cost. It usually bundles every borrowing obligation the company carried during the reporting period, including term loans, revolving credit lines, and corporate bonds.
Contractual Interest on Loans and Bonds
Accountants review each debt agreement for its principal balance and applicable rate. Fixed-rate instruments charge the same percentage for the life of the loan. Variable-rate instruments adjust periodically against a benchmark. The most widely used benchmark in the United States is the Secured Overnight Financing Rate (SOFR), a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.1Federal Reserve Bank of New York. Secured Overnight Financing Rate Data The basic calculation multiplies outstanding principal by the applicable rate and adjusts for the length of the reporting period.
Amortization of Bond Discounts and Premiums
When a company issues bonds below face value (a discount), the total cost of borrowing exceeds the stated coupon rate because the company received less cash than it will eventually repay. The reverse is true for bonds issued at a premium. Under the effective interest method, the discount or premium is spread over the life of the bond and folded into the interest expense line each period, so the reported figure reflects the true economic cost of the debt rather than only the coupon payments.
Accrued but Unpaid Interest
Accrual accounting records interest in the period it builds up, even if the cash payment has not yet gone out. If a reporting period ends June 30 but the loan payment is due July 15, the interest accumulated through June 30 still hits that period’s income statement. The unpaid portion appears on the balance sheet as accrued interest payable until it is paid.
Interest Income Shown Separately
If the company also earns interest income (on cash deposits or short-term investments, for example), both figures generally appear as separate line items. The default rule under U.S. GAAP is to present interest income and interest expense gross rather than netting them into one number, unless industry-specific guidance says otherwise.
When Interest Does Not Hit the Income Statement
Not every interest cost flows to the income statement in the period it is incurred. Under ASC 835-20, companies must capitalize interest on qualifying assets, meaning the interest is added to the asset’s cost on the balance sheet rather than expensed immediately. Qualifying assets are ones that take a substantial period to construct or produce before they can be used, such as a new manufacturing facility, a real estate development, or internally developed software.
Capitalization continues only while the asset is actively being built and expenditures and borrowing costs are being incurred. Once the asset is placed into service, capitalization stops. From that point forward, the capitalized amount reaches the income statement gradually through depreciation or amortization over the asset’s useful life. Off-the-shelf equipment and standard inventory do not qualify, so interest tied to them is expensed as it accrues.
Why the Placement Matters
Where interest expense sits shapes every profitability figure below it, and it feeds directly into how a company is taxed and analyzed.
Effect on Taxable Income
Interest expense reduces taxable income because federal law generally allows a deduction for interest paid or accrued during the tax year on business debt.2Office of the Law Revision Counsel. 26 USC 163 – Interest Each dollar of interest expense lowers the amount subject to the 21% federal corporate rate.3Office of the Law Revision Counsel. 26 US Code 11 – Tax Imposed The deduction is capped, however. Section 163(j) limits deductible business interest expense in any tax year to the sum of the company’s business interest income, 30% of its adjusted taxable income, and any floor plan financing interest, with amounts above the cap carried forward to future years. Small businesses with average annual gross receipts at or below an inflation-adjusted threshold ($31 million for the 2025 tax year) are generally exempt.4Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
How Analysts Read the Line
The most common use of the interest expense figure is the interest coverage ratio, which measures whether operating earnings are enough to keep up with debt payments. Dividing operating income (EBIT) by net interest expense produces the ratio. A company with $5 million in EBIT and $1 million in interest expense has a coverage ratio of 5.0×, meaning operating earnings cover the interest bill five times over. A ratio above 2.0× generally signals comfortable coverage. A ratio near 1.0× means almost all operating profit is consumed by interest, leaving little cushion if revenue softens. Lenders treat a declining ratio as a warning sign that can trigger tighter loan terms or credit downgrades.