What Is Excess Taxable Income on Form 8990?

The Tax Cuts and Jobs Act (TCJA) introduced a rule under Internal Revenue Code Section 163(j) that limits how much business-related interest expense a taxpayer can deduct annually. To manage this, the IRS created Form 8990, Limitation on Business Interest Expense Under Section 163(j). This form provides a standardized method to calculate the maximum amount of business interest expense that can be deducted on the current year’s tax return.

Any interest expense paid or accrued beyond this calculated limit is not lost, but its deduction is deferred to a future tax year. The form is a necessary filing for any business that has interest expenses and does not meet specific exemption criteria.

Determining if You Need to File Form 8990

The requirement to file Form 8990 hinges on a small business exemption determined by a gross receipts test. A business qualifies for this exemption if its average annual gross receipts for the three preceding tax years are below an inflation-adjusted threshold, which was $30 million for 2024.

To calculate the three-year average, a business sums the gross receipts from the prior three taxable years and divides by three. Gross receipts include sales revenue, income from services, interest, dividends, rents, and royalties. The determination is made annually, meaning a business could be exempt one year and required to file Form 8990 the next.

Certain businesses are not eligible for the small business exemption, even if they meet the gross receipts test. This exclusion applies to any business classified as a “tax shelter,” which often includes partnerships where more than 35% of losses are allocated to limited partners. Additionally, specific industries, such as an electing real property trade or business or an electing farming business, have their own pathways to bypass the limitation, which involves making a formal election that comes with other tax consequences, like altered depreciation schedules.

Information Required to Complete Form 8990

To complete Form 8990, a taxpayer must gather and calculate several financial figures. The accuracy of the form depends on having this information prepared correctly. These components form the building blocks of the interest limitation calculation.

Business Interest Expense

This is the total interest paid or accrued on debt that is directly related to a trade or business activity, encompassing loans for operational costs, equipment purchases, or business expansion. This figure does not include investment interest, which is subject to separate limitations. The initial figure for business interest expense should be calculated before applying any interest limitation.

Business Interest Income

This figure represents all interest income that is includible in the taxpayer’s gross income and is allocable to a trade or business. This does not include investment income. Examples of business interest income could include interest earned on working capital accounts or from seller-financed sales of business assets. This income component directly increases the amount of business interest expense that can be deducted.

Floor Plan Financing Interest

Form 8990 requires a separate accounting for floor plan financing interest. This is interest paid on financing used to acquire an inventory of motor vehicles, boats, or farm machinery held for sale or lease. This type of interest is treated differently because it is fully deductible and not subject to the same limitation as other business interest. It is added to the limitation amount, allowing a full deduction.

Adjusted Taxable Income (ATI)

Calculating Adjusted Taxable Income (ATI) is an involved preparatory step for Form 8990. The calculation begins with the business’s taxable income before considering any net operating loss (NOL) deduction or the interest limitation itself. From this starting point, several specific items must be added back to arrive at ATI.

The primary add-backs to taxable income include any business interest expense, any net operating loss deduction claimed, and any capital loss carrybacks or carryovers. Business interest income is subtracted. For tax years starting in 2022 and beyond, the add-back for depreciation and amortization was eliminated, resulting in a lower ATI and a more restrictive interest limitation for many businesses.

Calculating the Interest Limitation on Form 8990

Once all the necessary financial data has been compiled, the actual calculation of the business interest expense limitation on Form 8990 is a straightforward, formula-driven process. The form is designed to systematically apply the rules to the figures the taxpayer has prepared. The core of this process is determining the maximum deductible interest for the tax year.

The limitation is calculated as the sum of three distinct components: the taxpayer’s total business interest income for the year, 30% of the taxpayer’s Adjusted Taxable Income (ATI), and the taxpayer’s floor plan financing interest expense. The form guides the taxpayer to add these three amounts together to arrive at the total allowable business interest expense deduction.

The taxpayer then compares their total business interest expense, including any carryforwards from prior years, to this calculated limitation. If the total business interest expense is less than or equal to the limitation, the full amount is deductible in the current year. If the total business interest expense exceeds the limitation, the deduction is capped at the calculated limit.

Handling Disallowed Business Interest Expense

When a taxpayer’s total business interest expense for the year is greater than the calculated limitation on Form 8990, the excess amount is not permanently lost. This non-deductible portion is “disallowed business interest expense” and is eligible for carryforward to the next tax year. This mechanism ensures that the expense is deferred, not eliminated.

The amount of disallowed business interest expense is calculated on Form 8990 and becomes a carryforward figure. In the following tax year, this carryforward amount is added to that year’s current business interest expense. The combined total is then subject to the new year’s limitation, based on the new year’s business interest income and ATI.

This carryforward can be continued indefinitely until it is fully utilized. However, the deduction in any future year is always contingent upon that year’s specific interest limitation. Special rules apply to the carryforward of disallowed interest for partnerships, where the disallowed amount is allocated to the partners and carried forward at the partner level.