Instructions for Completing Form 8990 Schedule A

Form 8990, Limitation on Business Interest Expense Under Section 163(j), is used by taxpayers to calculate their maximum deductible business interest expense based on rules from the Internal Revenue Code. The deduction is generally limited to the sum of business interest income, 30% of adjusted taxable income, and any floor plan financing interest. Schedule A of Form 8990 is specifically for partners in a partnership. It serves as a summary to determine a partner’s final interest deduction limitation based on information provided by the partnership.

Determining the Filing Requirement for Form 8990

An exemption from filing Form 8990 exists for small businesses that meet a gross receipts test. To qualify, a taxpayer’s average annual gross receipts for the three preceding tax years must not exceed an inflation-adjusted threshold, which is $31 million for tax year 2025.

To calculate the average, a business totals its gross receipts for the three prior tax years and divides by three. Gross receipts include sales revenue, income from services, interest, dividends, rents, and royalties. For businesses operating for fewer than three years, the average is based on their years of operation. If a business is part of a controlled group, the gross receipts of all members must be combined to determine if the threshold is met.

Some trades or businesses are also excluded from the Section 163(j) limitation and the requirement to file Form 8990. These include being an employee, certain regulated utility businesses, and businesses that have made an election to be an “electing real property trade or business” or an “electing farming business.” These elections exempt the business from the interest limitation but come with other tax consequences, such as slower depreciation deductions.

Information Required for Schedule A

Before a partner can complete Schedule A, they must receive specific information from the partnership, which is provided on Schedule K-1 (Form 1065). The key figures are the partner’s share of excess business interest expense, excess taxable income, and excess business interest income. These items are allocated after the partnership completes its own Form 8990.

Excess business interest expense is the amount of the partnership’s interest expense that exceeded its annual limit. This non-deductible amount is passed to the partners, who must track it as a carryforward. Partners may be able to deduct this carryforward in a future year.

Excess taxable income and excess business interest income represent the partnership’s capacity to have deducted more interest. An allocation of these “excess” amounts allows a partner to deduct their carryforward. On Schedule K-1, excess business interest expense is in Box 13, code K, while excess taxable income and excess business interest income are in Box 20, codes AE and AF.

A Line-by-Line Guide to Completing Schedule A

Completing Schedule A involves summarizing the excess items allocated from one or more partnerships. The partner must list the name and employer identification number (EIN) of each partnership from which they received an allocation of excess items.

The partner inputs their share of excess taxable income and excess business interest income from each partnership’s Schedule K-1. The form then sums these amounts from all partnerships. This total represents the partner’s capacity to absorb previously disallowed business interest expense carryforwards.

Next, the partner enters their carryforward of excess business interest expense from prior years. The form then calculates how much of this carryforward can be treated as deductible business interest expense in the current year. This deductible portion is limited to the total amount of excess taxable income and excess business interest income allocated to the partner.

Any remaining excess business interest expense that could not be deducted in the current year is then calculated. This amount becomes the partner’s new carryforward figure to be used in future tax years. The schedule adjusts the partner’s carryforward balance, reducing it by the amount that became deductible.

Reporting the Results from Schedule A

The primary output from Schedule A is the amount of prior-year excess business interest expense the partner can now treat as paid or accrued. This newly deductible amount flows directly to the partner’s individual tax return, not the partnership return. For an individual partner, this amount is reported on their Form 1040, Schedule E, as a deductible expense.

The calculations on Schedule A impact the partner’s tax liability by allowing a deduction that was previously suspended, which reduces the partner’s taxable income. The partner must attach Form 8990, including the completed Schedule A, to their tax return to substantiate the deduction.

The final action is to properly track the remaining carryforward amount. The amount of excess business interest expense not absorbed by the current year’s excess income is carried forward indefinitely. The partner must maintain a record of this amount, as it will be used on the following year’s Form 8990, Schedule A.