IRS Swaps In FS-2026-14, Resetting The Working Text On The 163(j) Interest Cap

The IRS said on Aug. 19 that it had updated its frequently asked questions on the limitation on deducting business interest expense, issuing them as fact sheet FS-2026-14, which revises FS-2025-09 from last December ^[1][2]. For anyone underwriting debt, that document is the working text on Section 163(j), the rule that generally caps the deduction at 30% of adjusted taxable income and therefore decides how much of the interest bill is real ^[3].

The frame, as the fact sheet describes it: before the 2017 Tax Cuts and Jobs Act, 163(j) reached only certain interest paid or accrued by corporations ^[4]. The TCJA imposed the 30%-of-ATI limit starting in 2018, with carve-outs for businesses averaging $25 million or less in gross receipts over the three preceding tax years and for certain regulated utilities ^[3][5]. Investment interest and floor plan financing interest are also exempt, according to accounting firm Kahn, Litwin, Renza & Co. as cited in the report ^[6]. The CARES Act amended the section on March 27, 2020, and Treasury and the IRS finalised regulations in September 2020 and January 2021 ^[7][8].

The new material sits at the end. Of the fact sheet's 20 questions, the last two address the One, Big, Beautiful Bill Act ^[9]. Topic D has been rewritten from the FS-2025-09 version specifically to separate substantive changes in law from clarifications of existing law, and the fact sheet notes that its use of "change" refers to statutory language rather than to any change in the operative effect of the law ^[10]. That distinction is not cosmetic. A clarification carries the IRS position that nothing moved, and the agency says explicitly that the capitalisation clarification does not reflect a change in Treasury and IRS position ^[13].

Four items are listed ^[11]. The one that moves models: for tax years beginning after Dec. 31, 2024, depreciation, amortisation and depletion are added back to taxable income in computing ATI, having been excluded for years beginning after Dec. 31, 2021 and before Jan. 1, 2025 ^[12]. On a business with 100 of EBITDA and 30 of D&A, capacity goes from 21 to 30, roughly 43% more deductible interest, purely from the definition of the base ^[1].

Second, 163(j) applies to all business interest expense regardless of whether it would be deducted or capitalised under any mandatory or elective capitalisation provision, excluding only interest capitalised under sections 263(g) or 263A(f) ^[13]. Third, for tax years beginning after Dec. 31, 2025, CFC income inclusions under sections 951(a), 951A(a) and 78 come out of the ATI computation, so a U.S. shareholder can no longer lift ATI with a portion of those inclusions, and the September 2020 proposed regulations under Treas. Reg. 1.163(j)-7(j) can no longer be relied on for those years ^[14][15]. Fourth, the motor vehicle definition for floor plan financing interest now takes in trailers and campers designed for temporary living quarters and to be towed by or affixed to a motor vehicle, for tax years beginning after Dec. 31, 2024 ^[16].

Watch the promised rulemaking: Treasury and the IRS plan to issue guidance addressing these changes and clarifications, which is the gap borrowers with CFC structures are sitting in right now ^[17]. Also watch the second OBBBA question, which asks what effect the changes have; the published excerpt breaks off inside it ^[18].