How to Report Excess Business Interest Expense From a K-1

Internal Revenue Code Section 163(j) limits how businesses deduct interest expenses. This provision impacts various business structures, including partnerships and S corporations, which pass tax attributes to owners on a Schedule K-1. When a business cannot fully deduct its business interest expense, the non-deductible portion, known as excess business interest expense (EBIE), passes through to individual owners. Understanding how to identify and report this EBIE from a K-1 is essential for tax compliance.

Understanding Excess Business Interest Expense

Excess business interest expense (EBIE) is the portion of a business’s interest expense that cannot be deducted in the current tax year due to federal tax limitations. Section 163(j) generally caps deductible business interest at the sum of the taxpayer’s business interest income, 30% of its adjusted taxable income (ATI), and its floor plan financing interest.

The business interest expense limitation applies at the entity level for pass-through entities like partnerships and S corporations. The entity calculates its deductible interest based on its own ATI. Any business interest expense exceeding this limit at the entity level becomes EBIE.

This disallowed interest is allocated to the owners of the pass-through entity, such as partners or S corporation shareholders. The EBIE is reported to these owners on their Schedule K-1s. While S corporations carry forward disallowed interest at the corporate level, partnerships allocate EBIE directly to their partners.

Adjusted taxable income (ATI) is a key component of this calculation. For tax years after 2021, ATI generally excludes deductions for depreciation, amortization, and depletion. This adjustment can impact the overall limit on deductible business interest expenses, potentially leading to higher EBIE.

Floor plan financing interest receives more favorable treatment under Section 163(j). It refers to interest paid on debt used to finance the acquisition of motor vehicles held for sale or lease, secured by that inventory. This interest is fully deductible and is added back to the 30% ATI limitation, increasing the overall cap on deductible business interest.

Identifying Relevant Information from Your K-1

A Schedule K-1 from a pass-through entity details your share of the entity’s income, deductions, credits, and other items. For business interest expense limitations, specific boxes on the K-1 are important.

Excess business interest expense is typically reported in Box 11, Code F, on Schedule K-1 (Form 1065) for partners and Schedule K-1 (Form 1120-S) for S corporation shareholders. This code indicates the amount of business interest expense the entity could not deduct due to the Section 163(j) limitation. For partnerships, this amount passes through to partners; for S corporations, it is carried forward at the corporate level.

The amount in Box 11, Code F, is your allocable share of the entity’s non-deductible business interest expense. This is a starting point for your tax calculations and is not immediately deductible on your personal return. The K-1 may include accompanying statements or footnotes providing additional detail or context.

This EBIE, along with related items like excess taxable income and business interest income, is used for Form 8990, Limitation on Business Interest Expense Under Section 163(j). This form determines how much EBIE, if any, you can deduct in the current tax year. If a partnership reports EBIE, the partner must file Form 8990.

Reporting Excess Business Interest Expense on Your Tax Return

Once you identify your share of EBIE from your K-1, report it on Form 8990, Limitation on Business Interest Expense Under Section 163(j). This form calculates your deductible business interest expense for the current year and any amount carried forward. Taxpayers with business interest expense or carryforwards generally must file Form 8990.

As a K-1 recipient, you will focus on specific parts of Form 8990. For partners, Part II of Form 8990, “Partnership Pass-Through Items,” is where the partnership’s information is entered and allocated. For S corporation shareholders, Part III, “S Corporation Pass-Through Items,” is relevant.

Your share of EBIE from your K-1 (e.g., Box 11, Code F) will be transferred to the appropriate line on Form 8990. For partners, this amount is typically entered on line 3 of Form 8990, “Partner’s excess business interest expense treated as paid or accrued in current year.” The instructions for Form 8990 provide guidance on how K-1 recipients should integrate their allocated amounts.

The purpose of completing Form 8990 is to determine how much of the carried-forward interest expense, if any, can be deducted in the current year based on your own adjusted taxable income (ATI). The form guides you through a calculation that considers your business interest income, 30% of your ATI, and any floor plan financing interest. The outcome of Form 8990 then flows to your main tax return. For instance, if you operate as a sole proprietor with other business activities, the deductible amount might flow to Schedule C (Form 1040), Profit or Loss From Business. If your K-1 is from a partnership or S corporation, the deductible amount would generally be reflected on Schedule E (Form 1040), Supplemental Income and Loss.

Managing Excess Business Interest Expense Carryforwards

Any excess business interest expense (EBIE) that cannot be fully deducted in the current tax year, as determined by Form 8990, becomes a “carryforward” to future tax years. This means the disallowed amount is not lost but can potentially be deducted in subsequent years when the taxpayer’s business interest limitation allows. The carryforward generally extends indefinitely, providing an opportunity to utilize the expense when financial conditions permit.

Taxpayers must maintain accurate records to track these carryforwards diligently. This includes keeping copies of all filed Forms 8990 and any supporting worksheets or schedules. Form 8990 itself includes sections and worksheets designed to help taxpayers track their disallowed business interest expense carryforwards from prior years.

The ability to deduct carried-forward interest expense in a future year remains subject to the Section 163(j) limitation in that future year. Each year, the taxpayer must re-evaluate their business interest deduction capacity based on their current year’s business interest income, adjusted taxable income (ATI), and floor plan financing interest. The carryforward amount is then added to the current year’s business interest expense for purposes of applying the limitation.

The carried-forward amount is reported on future tax returns primarily through Form 8990. It is entered on line 2, “Disallowed business interest expense carryforwards from prior years,” in Part I of the form. This ensures that the prior year’s disallowed interest is considered in the current year’s limitation calculation. Accurate tracking is important for compliance and to ensure that the taxpayer can eventually benefit from the deduction when allowed, potentially reducing future tax liabilities.