Business Interest Expense and EBITDA: What the Return of EBITDA Means for Leverage

The One Big Beautiful Bill Act (OBBBA) restores depreciation, amortization, and depletion to the business interest expense limitation calculation. That shift may unlock millions in previously disallowed interest deductions. For highly leveraged entities wrestling with restrictive limits, it creates both significant opportunities and complex planning challenges that demand immediate attention.

How the Business Interest Expense Limitation Has Changed Over Time

Under the Tax Cuts and Jobs Act (TCJA), Section 163(j) limited business interest expense deductions to 30% of adjusted taxable income. Beginning in 2022, that income was calculated using an EBIT-based approach that excluded depreciation, amortization, and depletion. This created substantial limitations for capital-intensive businesses and highly leveraged entities, often trapping interest expenses in perpetual disallowance cycles.

The OBBBA fundamentally changes this landscape by permanently restoring the add-back of depreciation, amortization, and depletion when calculating adjusted taxable income for tax years beginning after December 31, 2024. This shift back to an EBITDA-based calculation dramatically increases the limitation threshold for most businesses, particularly those with significant depreciation and amortization expenses.

“The restoration of EBITDA for interest expense calculations represents one of the most impactful changes for leveraged businesses in recent tax history,” explains Steve Mills, CPA of Insero Advisors, LLC. “We’re seeing clients who haven’t been able to deduct significant portions of their interest expense suddenly able to utilize current-year deductions and potentially recover previously disallowed amounts.”

Why EBITDA Is Once Again Central to Interest Expense Calculations

EBITDA increases adjusted taxable income relative to EBIT by adding back depreciation and amortization. Because the 30% limitation applies to a higher earnings base, companies may be able to deduct more interest. The impact is often most significant for businesses with substantial fixed assets or acquisition-related amortization.

Under an EBITDA-based limitation, many businesses will see a higher ceiling for deductible interest. In practical terms, expanded deductibility may result in:

• Greater current-year deductibility of interest expense
• Faster utilization of previously disallowed Section 163(j) carryforwards
• Improved after-tax cash flow

For organizations that accumulated interest carryforwards in recent years, the expanded limitation may accelerate their absorption. Modeling becomes essential, particularly for companies operating across multiple entities or jurisdictions.

How EBITDA-Based Limits Change Borrowing Capacity and Leverage

The return to an EBITDA-based limitation directly affects how much debt a business can support on an after-tax basis. By expanding the earnings base used in the 30% calculation, the OBBBA increases deductible capacity for many highly leveraged and capital-intensive entities.

For organizations with significant depreciation and amortization, the expanded limitation may shift interest expense from continued deferral to full current-year deductibility. That change can materially influence debt positioning, refinancing decisions, and the overall cost of capital.

However, the 30% threshold remains unchanged. Businesses with minimal EBITDA relative to interest expense can still face limitations, particularly if depreciation and amortization decline in future years. Expanded deductibility should not be viewed as unlimited capacity. As borrowing flexibility increases, leadership teams should carefully evaluate multi-year projections to ensure that additional leverage today doesn’t create renewed limitation pressure in later periods.

What the Return to EBITDA Means for Financial Planning and Capital Structure

The transition from TCJA rules to OBBBA provisions introduces important planning considerations, particularly in how existing Section 163(j) carryforwards interact with the restored EBITDA-based limitation. Businesses must evaluate how those carryforwards apply under the new calculation, especially in tax years that span the effective date transition.

Carryforward utilization rules remain unchanged, meaning disallowed business interest expense from prior years continues to carry forward indefinitely until absorbed. However, the expanded limitation capacity under OBBBA may allow businesses to utilize those carryforwards more quickly than previously anticipated. For some organizations, the difference between continued deferral and current-year deductibility may come down to timing and modeling.

“The key to maximizing these benefits lies in evaluating the interaction between existing carryforwards and the revised limitation,” notes Mills. “Businesses need to model their specific situations to determine optimal timing for additional leverage or accelerated carryforward utilization.”

Beyond transition mechanics, companies should also consider how expanded deductibility affects multi-year forecasts, debt positioning, and capital structure planning.

Strategic Considerations for Businesses Evaluating Debt and Growth Decisions

The return to an EBITDA-based limitation is more than a technical adjustment; it changes how businesses evaluate debt capacity, refinancing opportunities, and long-term growth initiatives. Organizations that act quickly to understand their specific implications and implement appropriate strategies will capture the greatest benefits, while those that delay risk missing valuable optimization opportunities.

Insero Advisors’ tax professionals are already working with clients to quantify the impact of these changes, model various scenarios, and develop implementation strategies that maximize benefits while maintaining operational flexibility. With over 50 years of experience helping growth-focused businesses navigate complex tax landscapes, we understand both the technical intricacies and strategic implications of these significant changes.

If your organization is evaluating debt, growth plans, or refinancing decisions, now is the time to assess how these changes affect your tax position. Schedule a consultation with our tax experts today to discuss how this shift may influence your specific situation.

References:

1. The Tax Cuts and Jobs Act (TCJA) of 2017: Research & Analysis
2. Questions and answers about the limitation on the deduction for business interest expense
3. What Is EBITDA? Formula, Definition & Meaning | CFI