EBITDA Is Back: How the Permanent Section 163(j) Fix Frees Up Interest Deductions

What changed, and why 2022 hurt

IRC § 163(j) limits the deduction for business interest expense to the sum of business interest income, 30 percent of "adjusted taxable income," and any floor-plan financing interest. The entire fight is over how adjusted taxable income — the base of that 30 percent calculation — is computed.

For tax years beginning before 2022, adjusted taxable income was an EBITDA-like figure: it was computed without subtracting depreciation, amortization, and depletion, so those amounts were effectively added back, enlarging the base and the allowable interest deduction. Starting with tax years beginning after December 31, 2021, the Tax Cuts and Jobs Act removed that add-back, switching to an EBIT-like measure. For a capital-intensive or highly leveraged business with substantial depreciation, that change shrank adjusted taxable income, shrank the 30 percent pool, and shrank the deductible interest — at the same time interest rates were climbing. The result, for many middle-market, real-estate, and private-equity-backed companies, was a real cash-tax increase driven entirely by the formula.

The One Big Beautiful Bill Act (OBBBA), Public Law 119-21, signed July 4, 2025, reversed that change and made the reversal permanent. For tax years beginning after December 31, 2024, adjusted taxable income is again computed by adding back depreciation, amortization, and depletion — the EBITDA measure. The law accomplished this by striking the sunset clause that had limited the add-back to pre-2022 years, so there is no longer any expiration to plan against.

What the restoration is worth

For 2025, this is live, current law, and the benefit is concrete: a larger interest-deduction capacity for any business whose depreciation and amortization are material relative to its interest expense. The companies that lost the most from 2022 to 2024 — those with heavy fixed assets and meaningful leverage — recover the most now.

The practical implications are worth working through rather than assuming. A business that had been disallowing interest under the old EBIT formula, carrying the excess forward, may find more of its current interest deductible in 2025. Carryforwards of previously disallowed interest may become usable sooner against the larger base. And capital-structure decisions — how much leverage a structure can carry while keeping interest deductible — should be re-modeled under the restored formula, because the answer changed in the borrower's favor.

The trap that springs in 2026

Here is where the analysis must stay disciplined, because the same law that restored the EBITDA base added a constraint that does not take effect yet — and treating it as current law in 2025 would be wrong.

Effective for tax years beginning after December 31, 2025 — so 2026 for calendar-year businesses — OBBBA added a coordination rule between § 163(j) and the provisions that allow interest to be capitalized. The substance closes a planning technique. Some taxpayers had reduced their § 163(j) exposure by electing to capitalize interest into the cost of property rather than deducting it, moving that interest outside the limitation. The new rule applies the § 163(j) limitation first, without regard to whether the taxpayer would otherwise deduct or capitalize the interest, and treats capitalized interest as still subject to the limit. In effect, electing to capitalize interest will no longer sidestep § 163(j). The rule includes carve-outs for interest capitalized under certain specific provisions, but the general workaround is closing.

The timing distinction is the point for a 2025 reader. The EBITDA restoration is in effect now. The capitalized-interest coordination rule is enacted but not yet effective — it bites in 2026. A business that capitalizes interest as part of its current strategy has this year to understand how the 2026 rule will change the math, but it does not apply to 2025 tax years.

What to do with this

The defensible posture has two parts, separated in time.

For 2025, recompute the § 163(j) limitation under the restored EBITDA base, reassess how much previously disallowed interest becomes deductible, and revisit leverage assumptions that were built around the tighter EBIT formula. This is straightforward upside for capital-intensive borrowers, and it is current law.

For 2026, model the capitalized-interest coordination rule before it takes effect. Any structure that relies on capitalizing interest to manage the § 163(j) limit should be tested against the new ordering rule now, so that the change is anticipated rather than discovered on a 2026 return. This is the proactive half of the analysis — the part where knowing the rule a year early is worth something.

Key takeaways

• OBBBA (Pub. L. 119-21) permanently restored the EBITDA-based computation of adjusted taxable income under IRC § 163(j) — adding back depreciation, amortization, and depletion — effective for tax years beginning after December 31, 2024.
• The restoration expands deductible interest capacity for capital-intensive and leveraged businesses and is current law for 2025.
• A separate new rule, effective for tax years beginning after December 31, 2025, coordinates § 163(j) with interest-capitalization provisions so that capitalizing interest no longer avoids the limitation.
• The EBITDA benefit applies now; the capitalized-interest coordination rule applies in 2026 and should be modeled before then.

Frequently asked questions

Does the restored interest formula apply to my 2025 return?

Yes. The EBITDA-based computation of adjusted taxable income is effective for tax years beginning after December 31, 2024, so it applies to 2025 for calendar-year taxpayers and is current law.

I capitalize interest to manage the limitation. Is that still effective?

For 2025, the existing rules apply. But for tax years beginning after December 31, 2025, a new coordination rule applies § 163(j) regardless of whether interest is deducted or capitalized, so electing to capitalize interest will generally no longer sidestep the limitation. The change should be modeled now ahead of 2026.

Can I use interest I had to disallow in prior years?

Possibly sooner. Previously disallowed interest carried forward may become deductible against the larger EBITDA-based adjusted taxable income; the carryforward should be re-examined under the restored formula.

Bottom line

The permanent return of the EBITDA base is real, immediate relief for leveraged businesses, and 2025 deductions should be recomputed to capture it. But the same law sets a 2026 limit on capitalizing interest around § 163(j) — so the complete response is to take the 2025 benefit and model the 2026 constraint before it arrives.