Key Takeaways:
- Tax law changes restore depreciation, depletion, and amortization add‑backs when calculating business interest limits for tax years beginning after 2024.
- Equipment‑ and asset‑heavy firms may now deduct more interest expenses and should model how the 30% EBITDA cap affects future years.
- Firms should coordinate interest deduction strategy with bonus depreciation, Section 174 research costs, and accounting method elections.
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Recent tax law changes provide relief for businesses facing tight interest deduction limits under Section 163(j) (“§163(j)”) and create a planning environment that aligns more closely with asset‑heavy operations. Firms in manufacturing, life sciences, technology, entertainment, and other capital‑intensive industries should take notice: the ability to deduct interest expense is once again shifting in favor of companies with large depreciation, amortization, and depletion components.
What Changed and Why It Matters
Historically, §163(j) limited business interest deductions to 30% of a taxpayer’s adjusted taxable income (ATI). ATI had been calculated in a way that added back depreciation, depletion, and amortization (DD&A) for periods before 2022, effectively providing a broader base for interest deduction. However, beginning with tax years after 2021, the DD&A add‑back was eliminated (making ATI more like earnings before interest and taxes (EBIT)), which dramatically narrowed deductible interest.
Under the recent legislation, applicable for taxable years beginning after December 31, 2024, businesses may again include depreciation, amortization and depletion in the ATI computation — effectively reverting to an EBITDA‑based approach for the 30% cap. This shift matters especially for companies with large capital investments and debt financing: It means more of their interest expense may now be deductible, improving cash flow and reducing tax drag.
Who Benefits and What to Watch
Asset-rich firms in sectors such as manufacturing, technology, or life sciences are likely the key beneficiaries. For instance, businesses with substantial equipment, software amortization, or facility depreciation previously found themselves gridlocked by a narrow ATI base. With the restored DD&A add‑backs, those firms may recover interest deduction capacity.
CFOs and tax executives should, however, keep several items in mind:
- The 30% cap is still in place: The relief increases the base, but interest still cannot exceed 30% of the renovated ATI.
- Relief only applies for tax years beginning after 2024: Businesses with fiscal years crossing the threshold must model both pre‑ and post‑relief years.
- Carryforwards of disallowed interest still exist: Amounts under §163(j) remain subject to the new rules, so modeling of carryforwards is essential.
- Coordination with other provisions: Accelerated depreciation under Bonus Depreciation, research and experimental expense capitalization under Section 174, and method changes can materially change the benefit.
Tying Interest Deduction Relief to Broader Tax Planning
Given the timing and coordination needed, interest deduction strategy should not stand alone. For example, firms that also deploy large investments eligible for bonus depreciation or have research and development (R&D) activities subject to Section 174 elections must integrate their analyses.
- Bonus depreciation: The restoration of 100‑percent bonus depreciation means firms may accelerate deductions that increase depreciation and amortization. Those increased deductions feed into the DD&A add‑back formula under §163(j), enhancing the interest base.
- Section 174 and method changes: Companies that capitalize or amortize R&D costs (rather than expensing them at once) may change ATI calculations and interest eligibility. Understanding when capitalization begins — and how method changes apply — becomes vital.
- Timing and layering: The benefit of restored interest deduction capacity may be greatest in years when capital investments are heavy and taxable income is robust. Firms should run scenarios where interest, depreciation, R&D amortization, and elections align for maximum effect.
Practical Steps for Tax Executives and CFOs
To get the most from the restored bonus depreciation and §163(j) changes, tax leaders should take a structured approach that addresses both federal and state considerations:
- Build a forward‑looking model: Capture interest expense, depreciation/amortization, carry‑forward interest, and adjusted taxable income under both pre‑relief and post‑relief rules.
- Audit your asset classes and recent transactions: inventory your equipment, software, facility expenditures — and align them to bonus depreciation, Section 179 (if applicable), and amortizable assets under Section 174.
- Review your debt structure and financing: Firms should evaluate the amount of interest expected in 2025 and beyond and consider whether accumulating interest carryforwards can be drawn down more quickly given the improved deduction base.
- Coordinate with state tax: Some states may not conform to the federal change in §163(j) or may compute adjusted income differently. State‑level modeling is still critical.
- Monitor IRS guidance and elections: As the law is new, many regulations may still be developing. Document your decisions carefully and keep flexibility to adapt as rules clarify.
Integrating Interest Deductions Into Broader Tax Planning
MGO helps mid‑market companies in technology, manufacturing, life sciences, entertainment, and other capital‑intensive sectors interpret these interest deduction changes and integrate them into their broader tax strategy. Whether you’re reevaluating debt structure, modeling interest carryforwards, or coordinating bonus depreciation and R&D elections, our team offers practical guidance, scenario analysis and implementation support.
Reach out to our team today to see how these strategies can optimize your tax position and support your growth plans.
