How much business interest expense can a partnership deduct each year?

by TurboTax• Updated 1 month ago

Due to the business interest expense limit, also known as the section 163(j) limitation, if your gross business receipts are over a certain amount, some of your business interest expense might be limited.

You must complete form 8990 to determine your section 163(j) limitation. If it applies to you, your business interest expense deduction for the year will be limited to:

Your Business interest income plus
30% of your adjusted taxable income (if positive), and
Any floor plan financing interest expense (usually a vehicle dealership’s financing expense)

Who isn't required to file form 8990?

You’re not required to file form 8990 if:

You’re a small business taxpayer and don't have excess business interest expense from a partnership, or
Your only interest expense is from one of the following excepted trades or businesses:
- A business providing services as an employee
- A real estate business that files an election
- A farming business that files an election
- Certain regulated utility businesses

Who's a small business taxpayer and what's the gross receipts test?

An individual or a partnership that’s not a tax shelter, and who meets the gross receipts test, is likely a small business taxpayer.

For 2024, you pass the gross receipts test if your average annual gross receipts for the last three years are $30 million or less.

Can I carry forward disallowed business interest expenses?

Any business interest expense not allowed in one year is carried forward to the next year. The carry-forward may again be subject to the section 163(j) limitation.

Do partnerships file form 8990?

Partnerships who aren't excluded must file form 8990 if they have:

Business interest expense
A carryforward or
Current year, or prior-year excess business interest expense (see below)

Even if a partnership has no interest expense, if it’s allocating excess taxable income or business interest income, it will file Form 8990.

How does the section 163(j) limitation apply to partnerships and partners?

If the limitation applies, it’s applied at the partnership level.

The partnership doesn’t carry over the partnership’s disallowed interest expense. Instead, it’s allocated to each partner just like the partnership’s income or loss allocation. The disallowed amount is called the excess business interest expense (EBIE). A partner carries forward their share of EBIE to the next year.

In a future year, if they have enough of certain income types allocated from the partnership, a partner can use their carry-forward as an expense of the current year. However, the limitation rules will once again apply.