At a Glance
Large businesses may be able to deduct more business interest expense beginning with tax years after December 31, 2024. The change modifies how adjusted taxable income is calculated for purposes of the business interest expense limitation by no longer requiring businesses to deduct depreciation, amortization, and depletion in that calculation.
As a result, businesses using bonus depreciation or Section 179 may be able to accelerate depreciation deductions without reducing the amount of business interest expense they can deduct.
Key Takeaways
- Beginning with tax years after December 31, 2024, depreciation, amortization, and depletion are no longer required deductions when calculating adjusted taxable income for the business interest expense limitation.
- The change may increase adjusted taxable income and allow a larger business interest expense deduction.
- Businesses may be able to use bonus depreciation and Section 179 expensing without reducing the amount of deductible business interest expense.
- The provision is particularly relevant to large businesses subject to the business interest expense limitation.
- For 2025, a large business is one with average annual gross receipts for the prior three years exceeding $31 million.
Who Is Affected
This change may affect large businesses that are subject to the limitation on business interest expense deductions.
For 2025, a business is considered large if its average annual gross receipts for the previous three years exceed the applicable IRS threshold of $31 million.
The provision may be especially relevant to businesses that:
- Have significant interest expense
- Invest in depreciable assets
- Use, or are considering using, bonus depreciation
- Claim, or are considering claiming, Section 179 expensing
Eligibility and Key Requirements
Eligibility Requirements
The change applies to businesses subject to the business interest expense limitation.
Businesses should evaluate their average annual gross receipts for the prior three years to determine whether they meet the large-business threshold and are subject to the limitation.
Limits, Thresholds, and Phaseouts
For 2025, the large-business threshold is average annual gross receipts exceeding $31 million for the previous three years.
The article illustrates the business interest expense limitation using a 30% limitation percentage. Under the updated adjusted taxable income calculation, the amount of deductible business interest expense may increase because depreciation, amortization, and depletion are no longer required deductions in determining adjusted taxable income.
Exclusions and Special Rules
For tax years beginning on or after January 1, 2022, businesses were required to deduct depreciation, amortization, and depletion when calculating adjusted taxable income for purposes of the business interest expense limitation.
For tax years after December 31, 2024, those deductions are no longer required when calculating adjusted taxable income.
This change allows businesses to use accelerated depreciation methods, including bonus depreciation and Section 179, without reducing the amount of business interest expense they may deduct.
Documentation and Reporting
The article does not identify specific reporting requirements. Businesses should retain records supporting:
- Average annual gross receipts for the prior three years
- Business interest expense incurred
- Depreciation, amortization, and depletion deductions
- Adjusted taxable income calculations
- Bonus depreciation deductions
- Section 179 deductions
Effective Dates
The updated calculation of adjusted taxable income applies to tax years after December 31, 2024.
The prior calculation rule requiring deductions for depreciation, amortization, and depletion applied to tax years beginning on or after January 1, 2022.
For 2025, the large-business gross-receipts threshold is $31 million.
Planning Considerations
Businesses with significant interest expense should review whether the updated adjusted taxable income calculation increases their deductible business interest expense.
Businesses considering capital investments may want to evaluate the interaction between:
- Business interest expense deductions
- Bonus depreciation
- Section 179 expensing
- Other depreciation methods
Because bonus depreciation and Section 179 may be available without decreasing the business interest expense deduction under the updated calculation, businesses may have additional flexibility when planning capital expenditures and managing cash flow.
Businesses should also monitor their average annual gross receipts to determine whether they are subject to the business interest expense limitation.
Example
A large business has business interest expense and also claims depreciation deductions related to its capital assets.
Under the prior calculation, depreciation, amortization, and depletion reduced adjusted taxable income, which could reduce the amount of business interest expense the business was permitted to deduct.
For tax years after December 31, 2024, the business is no longer required to deduct depreciation, amortization, and depletion when calculating adjusted taxable income for the business interest expense limitation. As a result, the business may have a higher adjusted taxable income amount and may be able to deduct more of its business interest expense.
Next Steps
- Determine whether the business exceeds the applicable average annual gross-receipts threshold.
- Recalculate the business interest expense limitation using the updated adjusted taxable income rules.
- Review planned capital expenditures and the potential use of bonus depreciation or Section 179 expensing.
- Retain documentation supporting interest expense, depreciation deductions, and adjusted taxable income calculations.
For additional information and tax-planning strategies, contact your RKL advisor.
Frequently Asked Questions
Who is affected by this change?
The change may affect large businesses subject to the business interest expense limitation. For 2025, a large business generally has average annual gross receipts exceeding $31 million for the prior three years.
What changed in calculating adjusted taxable income?
For tax years after December 31, 2024, businesses are no longer required to deduct depreciation, amortization, or depletion when calculating adjusted taxable income for the business interest expense limitation.
When does the change apply?
The change applies to tax years after December 31, 2024.
How can bonus depreciation and Section 179 affect the interest expense deduction?
Businesses may be able to claim bonus depreciation and Section 179 deductions without reducing the amount of business interest expense they can deduct under the updated adjusted taxable income calculation.
What records should a business retain?
Businesses should retain records supporting gross receipts, interest expense, depreciation deductions, Section 179 deductions, bonus depreciation, and adjusted taxable income calculations.
