The IRS Just Loosened the Rules on Deducting Business Interest. Here's Who Actually Benefits — and Who Needs to Check Twice.

Tax law rarely gets a mid-year refresh. But on August 19, 2026, the IRS updated its frequently-asked-questions guidance on one of the more consequential — and least discussed — provisions in the tax code for anyone running a leveraged business (one carrying meaningful debt): the Section 163(j) limitation on deducting business interest expense.

If that sounds like something only a corporate tax department needs to worry about, it isn't — the mechanics reach a wider group than the name suggests, including small-business owners, real estate investors, and — with an important caveat explained below — active traders who've structured their trading as a business.

What Section 163(j) Actually Limits

In any given tax year, a business generally can't deduct more interest expense than the sum of its business interest income, plus 30% of its adjusted taxable income (ATI), plus any floor-plan financing interest (the kind auto and equipment dealers use to finance inventory). Anything disallowed doesn't disappear — it carries forward indefinitely to future tax years. The rule applies broadly, to individuals, partnerships, S corporations, and C corporations, with an exemption for small businesses that meet a gross-receipts test — a three-year average under $32 million for 2026 (that threshold rises slightly most years for inflation).

The part that actually moves the needle is how adjusted taxable income gets calculated, because that 30% figure is only as generous as the income base it's 30% of.

What Changed: EBITDA Is Back

For tax years beginning after December 31, 2021 and before January 1, 2025, the ATI calculation was stingier: it didn't allow companies to add back depreciation, amortization, or depletion. That meant capital-intensive, highly depreciated businesses had a smaller income base — and therefore a smaller allowed interest deduction. The One Big Beautiful Bill Act reversed that for tax years beginning after December 31, 2024: businesses can once again add those non-cash charges back when computing ATI — a return to something closer to an EBITDA-style measure (earnings before interest, taxes, depreciation, and amortization). In plain terms, that means a larger allowed interest deduction for capital-heavy, debt-financed businesses going forward, compared with the stricter rule that applied for the prior three years.

The same law update also expanded the definition of a motor vehicle for floor-plan financing purposes to include trailers and campers designed as living quarters — a narrower change, but a real one for RV and camper dealers who finance inventory. And a separate provision, effective for tax years beginning after December 31, 2025, removes certain foreign-subsidiary income items from the ATI calculation for multinational filers — a less favorable change for that narrower group, with additional guidance still pending from Treasury.

Separately, earlier in 2026, the IRS issued Revenue Procedure 2026-17, giving real estate and farming businesses that had previously made an irrevocable election out of the interest limitation (in exchange for slower depreciation) a path to withdraw that election — relevant now that the EBITDA-style rule and full bonus depreciation (the ability to deduct the entire cost of qualifying property in the year it's placed in service) may make staying inside the limitation more attractive than it was before. That revenue procedure predates the August FAQ update but addresses the same underlying law change.

The Part the FAQ Doesn't Cover: Traders

Here's where this update requires a second layer of interpretation rather than a simple read of the FAQ. The IRS's Section 163(j) guidance is written for businesses in the general sense — it does not mention active securities traders, trader tax status, or margin interest anywhere in its text. That silence matters, because interest expense deductibility works differently depending on which category a given taxpayer falls into, and the category isn't always obvious.

An ordinary investor's margin interest is treated as investment interest under a different provision, Section 163(d). It's deductible only as an itemized deduction limited to net investment income for the year — a narrower, less flexible rule than Section 163(j), since it depends on itemizing and on having enough investment income to absorb the deduction, with any excess carried forward rather than used right away.

A trader who has separately qualified for trader tax status — a facts-and-circumstances determination based on the frequency, volume, and intent of their trading activity, not a box you check on a form — can potentially treat trading-related expenses, including margin interest, as ordinary business expenses instead, which is the category Section 163(j) actually governs. Whether that business-interest treatment then triggers the 163(j) limitation itself, or whether a given trading entity qualifies for the small-business exemption, depends on facts this FAQ update doesn't address and that a trader should work through with a qualified tax professional rather than assume in either direction.

The practical lesson: this IRS update is genuinely good news for a lot of leveraged businesses — but trading for a living and using margin doesn't, by itself, tell you whether it helps you. Which interest-expense rule applies depends on a status determination this FAQ simply doesn't make for you.

What to Do With This

This isn't a call to action on any specific trade or filing position. It's a prompt to check, with a tax professional familiar with trader taxation, three things before assuming this update changes anything for you: whether you have a credible claim to trader tax status in the first place, whether your trading entity's interest expense would fall under Section 163(j) or Section 163(d), and — if 163(j) does apply — whether your entity's gross receipts fall entirely under the small-business exemption threshold, in which case the limitation may not bind you at all.

This article is educational commentary on public tax guidance, not personalized investment, trading, or tax advice.