For businesses, finance teams, and tax preparers handling 2026 U.S. federal filings, this includes Australian companies that operate a U.S. entity or otherwise carry a U.S. filing obligation.
Many guides treat Form 8990 as a simple checkbox. It isn't. Filing requirements, adjusted taxable income calculations, entity-level rules, and carryforward treatment all shift depending on who's filing and what kind of debt sits on the books.
This article covers who needs to file, how the 163(j) limitation actually works, what information you'll need, the mistakes that trip up experienced preparers, and why you need to check the finalised 2026 IRS instructions before submitting anything.
Key Takeaways
- Form 8990 limits deductible business interest under Section 163(j); not every borrower must file
- Filing hinges on entity type, carryforwards, gross-receipts exceptions, and pass-through allocations
- The limit combines business interest income, a share of adjusted taxable income, and floor plan financing interest
- Partnerships and S corporations allocate excess items to owners under separate rules
- Confirm the current form revision, thresholds, and deadlines before filing for 2026
What Is Form 8990 and Why Is It Used?
Form 8990, officially titled "Limitation on Business Interest Expense Under Section 163(j)," documents how much business interest a taxpayer can deduct in the current year and how much carries forward.
The current revision is dated December 2025, and as of early 2026 the IRS hadn't published a separate edition for the year, per the Form 8990 instructions.
Section 163(j) doesn't permanently disallow interest expense. It limits how much can be deducted in a given year. Anything disallowed generally carries forward rather than disappearing, though partnership rules change that picture, as covered further below.
Form 8990 is a reconciliation tool, not a replacement for your books. It takes figures from your accounting records, applies tax-specific adjustments, and produces the number that lands on your return. Book profit and tax-adjusted income are rarely identical.
Who May Need to File Form 8990?
Form 8990 can apply to:
- C corporations with business interest expense tied to trade or business debt
- Partnerships calculating Section 163(j) items at the entity level
- S corporations with entity-level interest limitations
- Individuals running a business activity, including Schedule C or E filers
- Trusts and estates with business interest items, per Form 1041 instructions
A taxpayer may need to work through the calculation if they have current-year business interest expense, prior-year disallowed interest, or excess business interest expense allocated from a partnership.
Being subject to the 163(j) limitation and being required to attach Form 8990 are two different questions. Check the exact 2026 filing mechanics against the official instructions rather than assuming they match a prior year.
Who May Be Exempt or Excepted?
Small businesses can skip the limitation entirely if they meet the gross-receipts test. For tax years beginning in 2026, the three-year average annual gross receipts ceiling is $32 million, per Revenue Procedure 2025-32, calculated using 2023, 2024, and 2025 figures for calendar-year filers.
That said, meeting the receipts test alone doesn't guarantee exemption:
- Tax shelters under Section 448(d)(3) can't use the small-business exemption, regardless of size
- Aggregation rules under Section 448(c)(2) fold in related entities under common control, so receipts can't be tested in isolation
- A partnership allocating excess items to you can still create a filing obligation even if your own business qualifies as small
Certain trades or businesses, including qualifying real property, farming, and some regulated utilities, can elect out of the limitation entirely. These elections generally come at a cost: specified property must use the alternative depreciation system, which typically rules out the special depreciation allowance.
Don't rely on a threshold figure from an earlier year without confirming it against the finalised 2026 guidance.
How Form 8990 Works
The conceptual formula behind the 163(j) limitation looks like this:
Business interest income + 30% of adjusted taxable income + floor plan financing interest expense
That's a framework, not a line-by-line substitute for the form. Form 8990 itself walks through specific calculations, exceptions, and carryforward mechanics this formula doesn't capture.
Business interest expense is interest properly allocable to a trade or business, not investment interest, personal interest, or costs tied to activities that fall outside the trade-or-business definition. Business interest income works the same way, limited to amounts connected to the business.
Adjusted taxable income (ATI) is a tax-specific calculation. It's not book income, EBITDA, or the taxable income figure from a different return. Confusing ATI with financial statement profit is one of the more common errors preparers run into.
ATI treatment has shifted across recent tax years:
| Tax years beginning | Depreciation, amortisation, and depletion treatment |
|---|---|
| 2022–2024 | No add-back, an EBIT-style calculation |
| 2025 | Add-backs restored |
| 2026 | Add-backs continue, an EBITDA-style calculation |
That restoration matters. Treating 2026 as if it still follows the 2022–2024 EBIT approach produces the wrong number, according to IRS's August 2026 FAQs.
For years beginning after December 31, 2025, the rules also coordinate Section 163(j) with interest capitalisation requirements and exclude certain foreign inclusion amounts from ATI.
Current-Year Calculation Flow
Work through the calculation in this order:
- Identify the basics - taxpayer, tax year, entity type, business activities, related entities, and whether current-year or carryforward 163(j) amounts exist
- Gather the inputs - business interest expense, business interest income, ATI components, floor plan financing data, and prior-year carryforward schedules
- Complete the relevant parts of Form 8990 - applying entity-specific rules and reconciling results back to the income tax return
- Determine the outcome - the deductible interest amount, any disallowed portion, and anything that carries forward or allocates to owners
Partnership and S Corporation Considerations
Partnerships calculate Section 163(j) items at the entity level, but disallowed interest doesn't simply carry forward on the partnership's own books. Instead, it becomes excess business interest expense (EBIE), allocated out to partners.
Two other terms matter here:
- Excess taxable income (ETI): ATI the partnership didn't need to support its own interest deduction, allocated out and added to a partner's ATI
- Excess business interest income (EBII): business interest income exceeding the partnership's own expense, allocated to partners
A partner generally can't deduct allocated EBIE until that same partnership allocates them ETI or EBII in a later year. Even then, the released amount still has to clear the partner's own 163(j) limit.
S corporations work differently. Disallowed interest stays with the S corporation rather than flowing to shareholders as EBIE. ETI and EBII do pass through pro rata, and affected shareholders generally need Schedule B when completing Form 8990 Part I.
Illustrative example: A partnership has $200,000 of business interest expense, and its 163(j) limit caps the deduction at $150,000. The $50,000 excess becomes EBIE, allocated based on profit-sharing ratios. A partner holding a 20% interest picks up $10,000 of EBIE. That amount stays unusable until the same partnership allocates enough ETI or EBII to free it up.
Where Form 8990 Applies and When It Is Filed
Form 8990 attaches to the taxpayer's own return rather than being filed on its own. Depending on entity type, that means:
- Form 1120 for C corporations
- Form 1065 for partnerships
- Form 1120-S for S corporations
- Form 1041 for estates and trusts
- Form 1040 for individuals with business activity, including Schedule C or E
It follows the host return's filing and extension timeline. For calendar-year 2025 returns filed in the 2026 season, typical due dates are:
- Partnerships and S corporations: 16 March 2026
- C corporations, individuals, trusts and estates: 15 April 2026
Confirm the exact 2026 deadlines against entity type, fiscal year and extension status before relying on these dates.
The form matters most for:
- Leveraged businesses carrying significant debt
- Partnerships with pass-through interest items flowing to owners
- Groups with related entities subject to aggregation
- Real estate and farming operations weighing an exception election
- Businesses sitting on prior-year disallowed interest
Cross-border note: An Australia-based owner should first pin down which U.S. entity or activity actually carries the federal filing obligation. Form 8990 is a U.S. instrument tied to U.S. tax law. It isn't an Australian tax form, and it doesn't substitute for whatever reporting the Australian Taxation Office requires separately.
Key Factors, Issues, and Misconceptions
Several variables shape the outcome of a 163(j) calculation:
- Entity classification, ownership structure, and whether related businesses must be aggregated
- The character of the interest payment: trade-or-business debt, investment interest, acquisition financing, or qualifying floor plan financing
- ATI calculations and the specific adjustments that apply for the tax year in question
- Current-year interest, business interest income, and prior-year carryforwards
- Small business, tax-shelter, real property, farming, and regulated utility exceptions
Common Issues and Misconceptions
A few assumptions cause real problems:
- "All business loan interest is fully deductible." Not necessarily, and not every business with interest expense needs to file Form 8990.
- "Disallowed interest just disappears." It's generally tracked and carried forward, though partnership and ownership changes can affect how it's used.
- "Last year's threshold still applies." Using an outdated gross-receipts figure, stale ATI treatment, or an old form revision for 2026 filings is a frequent, avoidable error.
Reconcile your Form 8990 figures against loan statements, the general ledger, tax depreciation records, prior-year forms, K-1s, and ownership records before filing. Gaps between these sources usually signal a calculation error somewhere upstream.
When Form 8990 May Not Be Appropriate or Necessary
You may fall outside the filing requirement if:
- You qualify for a verified small-business exception or a confirmed excepted trade or business
- You have no business interest expense, carryforward, or other 163(j) item to report
Professional review is worth the cost when you're dealing with:
- Multiple entities or foreign ownership
- Partnership investments or significant debt
- Related-party financing or real estate elections
- K-1s that don't line up with your own records
For Australian businesses with U.S. entities, VJM Global helps organise accounting records, coordinate information for U.S. tax compliance, and review documentation that supports a filing position. The final tax determination should always come from an appropriately qualified U.S. tax professional.
Conclusion
Form 8990 applies Section 163(j) to work out how much business interest a taxpayer can deduct, and it tracks whatever carries forward or passes through to owners. There's no single formula that fits every taxpayer. Your result depends on several factors:
- Tax year and entity type
- Business activity and ATI treatment
- Interest classification and exceptions
- Ownership structure
Before filing for 2026, confirm you're working from the final IRS instructions, reconcile the calculation against your actual return, and get professional advice if your situation involves multiple entities or crosses borders.
Frequently Asked Questions
Who must file Form 8990?
Taxpayers with current-year business interest expense, carryforward amounts, or pass-through 163(j) items from a partnership may need to file. Exceptions exist, so check the 2026 IRS instructions for the exact filing requirement in your situation.
Who is subject to the Section 163(j) business interest limitation and who is exempt from filing Form 8990?
Most businesses with business interest expense are subject to the limitation unless they qualify for a verified small-business or other exception. Tax shelters and aggregated related entities generally can't rely on the small-business exemption.
How do I calculate tentative taxable income on Form 8990?
Tentative taxable income is a tax-specific starting point for adjusted taxable income, not your book profit. It must be calculated using the applicable 2026 Form 8990 instructions and their prescribed adjustments.
What qualifies as a business interest expense for Form 8990?
It's interest properly allocable to a trade or business, not investment interest or personal interest. Nonqualifying amounts generally follow different rules, so classification matters before you start the calculation.
What is excess taxable income on Form 8990?
Excess taxable income is the adjusted taxable income a partnership didn't need to support its own interest deduction. It gets allocated to partners, where it can free up previously allocated excess business interest expense.
What is Form 8990 and what is it used for?
Form 8990 calculates the Section 163(j) limitation on deductible business interest expense. It reports the deductible amount, any disallowed portion, and related pass-through items alongside the taxpayer's federal return.
