The Internal Revenue Service recently released Fact Sheet 2025-09 (FS-2025-09), providing updated guidance on the limitation on business interest expense deductions under Internal Revenue Code Section 163(j). This guidance incorporates significant statutory amendments arising from the legislation referred to as the "One, Big, Beautiful Bill" (P.L. 119-21). For tax professionals, these updates necessitate a careful review of adjusted taxable income (ATI) computations, the definition of motor vehicles for floor plan financing, and the interaction between interest limitations and capitalization rules.

This article examines the December 2025 revised questions within the Fact Sheet, correlating the IRS’s administrative positions with the underlying statutory text of Section 163(j). Note that while the prompt requests conclusions from a "court" or "judge," the provided source material consists of administrative guidance and statutory code; therefore, the analysis focuses on the conclusions and determinations issued by the IRS and Congress.

Gross Receipts Test and Safe Harbor Thresholds

The Fact Sheet updates the inflation-adjusted gross receipts test, which allows certain small businesses to exempt themselves from the Section 163(j) limitation. The IRS clarifies in Question 3 of Topic A that "the inflation adjusted gross receipts amount for 2025 is $31 million".

A critical technical conclusion regarding the fluctuation of gross receipts is found in Question 4. The IRS addresses a scenario where a taxpayer subject to the limitation in 2024 subsequently fails the gross receipts test in 2025 due to a decline in revenue. The Fact Sheet concludes: "The disallowed portion of business interest expense from 2024 that is carried forward to 2025, along with the amount of 2025 business interest, will not be subject to the limitation in 2025 because your average annual gross receipts for 2022-2024 is below $31 million".

This aligns with the statutory exemption in Section 163(j)(3), which states that the limitation "shall not apply to such taxpayer for such taxable year" if they meet the gross receipts test of Section 448(c).

Adjusted Taxable Income and Depreciation Add-backs

Perhaps the most significant change for tax years beginning after December 31, 2024, is the reinstatement of the depreciation, amortization, and depletion add-back in the calculation of ATI. In Topic E, Question 1, the IRS states: "For tax years beginning after Dec. 31, 2024, the One, Big, Beautiful Bill amended section 163(j) to add back deductions for depreciation, amortization, or depletion to taxable income when calculating ATI".

This reverses the stricter rule that applied from 2022 through 2024. The Fact Sheet notes that this modification "may benefit the taxpayer by increasing ATI allowing for a higher limitation amount on the calculation of business interest". This administrative guidance directly reflects the amended statutory language in Section 163(j)(8)(A)(v), which defines adjusted taxable income by computing taxable income without regard to "any deduction allowable for depreciation, amortization, or depletion".

However, practitioners must note a new exclusion effective for tax years beginning after December 31, 2025. Topic E, Question 2 clarifies that the legislation "amended section 163(j) to exclude a U.S. shareholder’s CFC income inclusion items under sections 951(a), 951A(a) and 78... from the computation of ATI". The Code confirms this new limitation in Section 163(j)(8)(A)(vi).

Floor Plan Financing and Recreational Vehicles

The definition of "floor plan financing interest" is critical because such interest is fully deductible and not subject to the 30% ATI limitation. The Fact Sheet revises the definition of a "motor vehicle" for these purposes.

In Topic C, Question 6, and Topic E, Question 1, the IRS outlines the expanded definition: "For tax years beginning after Dec. 31, 2024, a motor vehicle also includes any trailer or camper which is designed to provide temporary living quarters for recreational, camping or seasonal use and is designed to be towed by, or affixed to, a motor vehicle".

This expands upon the statutory definition found in Section 163(j)(9)(C), which previously focused on self-propelled vehicles, boats, and farm machinery. The Code now explicitly states the term includes "any trailer or camper which is designed to provide temporary living quarters for recreational, camping, or seasonal use and is designed to be towed by, or affixed to, a motor vehicle".

Interaction with Interest Capitalization Rules

For tax years beginning after December 31, 2025, the coordination between Section 163(j) and interest capitalization provisions undergoes a fundamental shift.

The IRS explains in Topic C, Question 2, that "section 163(j) is applied before any mandatory or elective interest capitalization provisions, except for sections 263(g) and 263A(f)". Consequently, "business interest expense for these years excludes any interest capitalized under section 263(g) and 263A(f) and includes all other business interest expense".

This is a direct application of the new Section 163(j)(10)(A), which mandates that "the limitation under paragraph (1) shall apply to business interest without regard to whether the taxpayer would otherwise deduct such business interest or capitalize such business interest under an interest capitalization provision".

Furthermore, Topic C, Question 7 addresses the carryforward treatment under this new regime. The Fact Sheet concludes: "For taxable years beginning after Dec. 31, 2025, no portion of any business interest carried forward from any taxable year to any succeeding taxable year is treated as interest to which an interest capitalization provision applies". This mirrors Section 163(j)(10)(C), which prevents the capitalization of disallowed interest carried forward.

Conclusion

The December 2025 updates to Fact Sheet 2025-09 provide essential clarity on the "One, Big, Beautiful Bill." Practitioners must adjust their compliance software and planning strategies to account for the favorable return of the depreciation add-back in 2025, the expanded definition of floor plan financing inventory, and the complex ordering rules regarding capitalization that take effect in 2026. As the Fact Sheet states regarding the capitalization changes, the limitation will apply "before any mandatory or elective interest capitalization provisions," fundamentally altering the tax treatment of interest in capital-intensive industries.

Prepared with assistance from NotebookLM.