Definitions — 1225 Inst 8990 (PDF)

The definitions below are only for the purposes of applying section 163(j).

Small business taxpayer. A small business taxpayer is not subject to the section 163(j) limitation and is generally not required to file Form 8990.

A small business taxpayer is a taxpayer that is not a tax shelter (as defined in section 448(d)(3)) and meets the gross receipts test, described below. A tax shelter is defined as:

Any entity described in section 6662(d)(2)(C)(ii). A pass-through entity that is a small business taxpayer does not allocate excess taxable income, excess business interest income, or excess business interest to its owners.

Gross receipts test. For tax years beginning in 2025, a taxpayer meets the gross receipts test if the taxpayer has average annual gross receipts of $31 million or less for the 3 prior tax years. A taxpayer’s average annual gross receipts for the 3 prior tax years is determined by:

Caution: The average annual gross receipts test threshold amount may be adjusted for inflation. The Instructions for Form 8990 may not be revised to reflect this amount. For tax years beginning after 2025, see the instructions for your applicable income tax return for the average annual gross receipts test threshold amount for the current tax year. The average annual gross receipts test threshold amount is also available at IRS.gov/ InflationAdjustment . Select the applicable tax year news release, then click the Revenue Procedure link to see the threshold amount under Limitation on Use of Cash Method of Accounting.

In the case of any taxpayer, which is not a corporation or a partnership, and except as provided below, the gross receipts test is applied in the same manner as if such taxpayer were a corporation or a partnership.

Gross receipts for any tax year must be reduced by returns and allowances made during the year. For individuals and for section 163(j) only, gross receipts do not include inherently personal amounts such as disability benefits, social security benefits, and wages received as an employee and reported on Form W-2.

For section 163(j), a taxpayer with an ownership interest in a partnership or S corporation must include a share of the partnership’s or S corporation’s gross receipts, in proportion to the partner’s distributive share of items of gross income or S corporation’s shareholder’s pro rata share of gross receipts, unless the partner and partnership, or S corporation shareholder and S corporation, are treated as a single person. In that case, see Gross receipts aggregation for members of a controlled group, businesses under common control, or members of an affiliated group , later.

The gross receipts of an organization subject to tax under section 511 only include gross receipts taken into account in determining its unrelated business taxable income.

Note: Gross receipts must meet the definition under section 448(c) and Temporary Regulations section 1.448-1T(f)(2)(iv). Any reference to your business gross receipts also includes a reference to the gross receipts of any predecessor of your business. If your business was not in existence for the entire 3-year period, base your average annual gross receipts on the period your business existed. Also, if your business had a tax year of less than 12

Adding the gross receipts for the 3 prior tax years, and
Dividing the total by 3.

Any enterprise other than a C corporation offering ownership via registered securities,
Any syndicate within the meaning of section 1256(e)(3) (B) (see Regulations section 1.163(j)-2(d)(3)), or

2 Instructions for Form 8990 (Rev. 12-2025)

months, your gross receipts must be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period.

The prior period gross receipts must be annualized for any short period before dividing by 3.

For assistance in preparing the average annual gross receipts, see the Average Annual Gross Receipts Worksheet Per Section 448(c), later.

Gross receipts aggregation for members of a controlled group, businesses under common control, or members of an affiliated group. For section 163(j), gross receipts may include the receipts of more than one taxpayer. For this purpose, all members of a controlled group of corporations (as defined in section 52(a)), and all members of a group of businesses under common control (as defined in section 52(b)), are treated as a single person; and all members of an affiliated service group (as defined in sections 414(m) and (o)) shall be treated as a single person. If you and a partnership or S corporation in which you hold an interest are treated as a single person for purposes of the gross receipts test, aggregate the partnership’s or S corporation’s gross receipts with your gross receipts. Do not duplicate amounts by also including a share of partnership or S corporation gross receipts as your own gross receipts.

reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Electing farming business. Farming businesses (as defined in section 263A(e)(4)) and specified agricultural and horticultural cooperatives (as defined in section 199A(g)(4)) may elect to not be subject to the section 163(j) limitation. See Elections under Special Rules, later, for the effect of making an election. A farming business includes livestock, dairy, poultry, fish, fruit, nut, and truck farms. It also includes plantations, ranches, ranges, and orchards. A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc., but it does not include an area where they are merely caught or harvested. A plant nursery is a farm for purposes of deducting soil and water conservation expenses.

A specified agricultural or horticultural cooperative is a cooperative to which Part I of subchapter T of the Internal Revenue Code applies that manufactures, produces, grows, or extracts any agricultural or horticultural product, or has marketed agricultural or horticultural products.

Certain regulated utility businesses. Certain regulated utility trades or businesses are not subject to the section 163(j) limitation. No election is required for certain regulated utility businesses, meaning these trades or businesses are automatically excepted from the limitation.

For more information, see Average Annual Gross Receipts Worksheet Per Section 448(c), later.

Also see FAQs Regarding the Aggregation Rules at IRS.gov.

Automatically excepted regulated utilities are trades or businesses that furnish or sell:

Tax shelter election. A taxpayer that is a tax shelter as defined in section 448(d)(3) is not permitted to use the small business exemptions contained in section 163(j)(3). Under section 448(d)(3), a taxpayer that is a “syndicate” is considered to be a tax shelter. To determine whether a taxpayer is a syndicate, the section 448 regulations permit a taxpayer to make an annual election to use its allocations of income, gain, loss, or deduction made in the immediately preceding tax year, instead of using its current year allocations. The election is made on a timely filed original return (including extensions) for the tax year for which it is made. It is only valid for that tax year and once made cannot be revoked. See Regulations section 1.448-2(b)(2)(iii)(B)(2) for guidance on the time and manner of making the annual election.

Excepted trade or business. A trade or business does not include:

Performing services as an employee,
An electing real property trade or business,
An electing farming business, or
Certain regulated utility businesses. How to make an election and the effect of being an excepted trade or business are discussed under Special Rules, later.

Electing real property trade or business. A real property trade or business engaged in activities described in section 469(c)(7) may elect to not be subject to the section 163(j) limitation. See Elections under Special Rules , later, for the effect of making an election. Real property trade or business means any real property development, redevelopment, construction,

Electrical energy, water, or sewage disposal services;
Gas or steam through a local distribution system; or
Transportation of gas or steam by pipeline. To be an automatically excepted regulated utility trade or business, the rates for furnishing or sale of the above listed items must be established or approved by a state or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any state or political subdivision thereof, on a rate of return and cost of service basis, or by the governing or rate-making body of an electric cooperative.

If the trade or business does not qualify as an automatically excepted regulated utility trade or business because its rates are not established or approved on a cost of service and rate of return basis, the taxpayer may be able to elect that the trade or business be an excepted trade or business. See Regulations section 1.163(j)-1(b) (15)(iii)(A) regarding electing utility trades or businesses. Also, see Elections under Special Rules, later, for the effect of making an election.

Interest. In general, interest is any amount that is paid, received, or accrued as compensation for the use or forbearance of money or that is treated as interest under the Internal Revenue Code or the regulations thereunder.

Regulations section 1.163(j)-1(b)(22) provides additional guidance on what constitutes interest for purposes of section 163(j), including anti-avoidance rules and a list of other amounts treated as interest, such as certain amounts of bond premium, factoring income, and section 163(j) interest dividends from regulated investment companies.

Instructions for Form 8990 (Rev. 12-2025) 3

Business interest income. Business interest income means the amount of interest income includible in the taxpayer’s gross income for the tax year, which is properly allocable to a trade or business. Business interest income does not include investment income.

See C corporation business interest expense and income , later.

Interest income that is allocable to an excepted trade or business is not treated as business interest income.

Business interest expense. Business interest expense means any interest paid or accrued that is properly allocable to a trade or business. Business interest expense includes elective capitalized interest but, generally, does not include investment interest or other personal interest. See Temporary Regulations section 1.163-9T for a definition of personal interest. However, see C corporation business interest expense and income , later.

Interest expense that is allocable to an excepted trade or business is not treated as business interest expense.

Excess business interest expense. If a partnership has a limitation on business interest expense, the disallowed business interest expense is not carried over by the partnership, but is allocated to the partners. This interest is referred to as excess business interest expense.

Tentative taxable income. Tentative taxable income is generally the same as taxable income under section 63. However, tentative taxable income is computed as if the section 163(j) limitation does not exist; therefore, do not include disallowed business interest expense carryforwards from a prior year or excess business interest expense from a prior year.

See Regulations section 1.163(j)-1(b)(43) for more information.

Adjusted taxable income (ATI). ATI means tentative taxable income of the taxpayer computed without regard to:

Any item of income, gain, deduction, or loss, which is not properly allocable to a trade or business (within the meaning of section 162);
Any business interest income or business interest expense;
The amount of any net operating loss deduction under section 172;
The amount of any qualified business income allowed under section 199A (for purposes of determining ATI the section 199A deduction is determined without regard to section 163(j). See Regulations section 1.163(j)-1(b)(43));
For tax years beginning before 2022, and after 2024, any deduction for depreciation, amortization, or depletion attributable to a trade or business; and
Adjustments described in published guidance. To determine ATI, tentative taxable income is computed after applying other sections limiting the deductibility of interest, such as sections 263A and 267, as well as basis, at-risk and passive activity loss limitations.

Applicable percentage. The applicable percentage is the percentage applied to ATI for purposes of computing the business interest expense limitation calculation. The applicable percentage is 30% (30% ATI limitation).

Floor plan financing interest expense. Floor plan financing interest expense is not subject to the section 163(j) limitation. Floor plan financing interest expense is interest on debt used to finance the acquisition of motor vehicles and any trailer or camper which is designed to provide temporary living quarters for recreational, camping, or seasonal use and is designed to be towed by, or affixed to, a motor vehicle that is held for sale or lease where the debt is secured by the acquired inventory.

Excess taxable income. In general, excess taxable income is the amount of a partnership’s or S corporation’s ATI that is in excess of the amount of ATI required to support the partnership’s or S corporation’s business interest expense deduction. This amount is computed by a partnership or an S corporation and is allocated to the partner or shareholder. This amount is used by the partner or shareholder in determining their current year ATI.

Excess business interest income. Excess business interest income is the amount by which current year business interest income exceeds current year business interest expense (excluding floor plan financing). This amount is computed by a partnership or an S corporation and is allocated to the partner or shareholder. This amount is used by the partner or shareholder in determining their current year business interest income.