Last updated: September 2, 2026
The IRS released Fact Sheet FS-2026-14 on August 19, 2026, replacing FS-2025-09 as the agency’s current FAQ set on the Section 163(j) limitation on deducting business interest expense. The headline figure: the inflation-adjusted gross receipts threshold for the small business exemption is $32 million for 2026, up from $31 million for 2025 and $30 million for 2024.
The short answer
Section 163(j) caps how much business interest you can deduct, but businesses under a gross receipts threshold are exempt. IRS Fact Sheet 2026-14 confirms that threshold is $32 million for 2026 ($31M for 2025, $30M for 2024), tested on a rolling three-prior-year average of gross receipts.
What happened
Section 163(j) generally limits a business’s deduction for interest expense to the sum of business interest income, 30% of adjusted taxable income, and floor plan financing interest. Interest disallowed in one year carries forward indefinitely.
Most small businesses never compute it, because the statute exempts taxpayers meeting the Section 448(c) gross receipts test — average annual gross receipts of $25 million or less over the three prior tax years, indexed annually for inflation. The updated fact sheet sets out where that indexed number now stands:
| Tax year | Gross receipts threshold | Three years averaged |
|---|---|---|
| 2024 | $30 million | 2021–2023 |
| 2025 | $31 million | 2022–2024 |
| 2026 | $32 million | 2023–2025 |
The fact sheet also works through a scenario worth reading closely. A business whose 2021–2023 average exceeded $30 million was subject to the limitation for 2024, and carried disallowed interest forward into 2025. But because its 2022–2024 average came in below the $31 million threshold, it was not subject to the limitation for 2025 — and neither the carryforward nor the current-year 2025 interest was limited. It simply did not have to compute Section 163(j) that year.
Note the exclusion: the exemption is unavailable to a tax shelter as defined in Section 448(d)(3), regardless of size.
Why it matters
The test is a rolling three-year average against a moving threshold. That has a consequence most owners don’t anticipate: you can fall into the limitation in one year and back out of it the next without your business changing much at all.
Two things move independently. Your three-year average shifts as a strong year rolls off the back and a new year rolls on the front. The threshold itself climbs with inflation — $2 million in two years. A business hovering in the high twenties to low thirties can cross the line in either direction based on which years happen to be in the window.
That matters more in 2026 than it did a few years ago, for a simple reason: interest expense is larger. Businesses that took on debt at current rates have a materially bigger interest line than they did in the cheap-money era, so the difference between deducting it and carrying it forward is real money rather than a rounding item.
“The inflation adjusted gross receipts amount for 2024 is $30 million, for 2025 is $31 million, and for 2026 is $32 million.” — IRS Fact Sheet 2026-14
What this means for your business
If your revenue is nowhere near $32 million, this is a filing-cabinet item. If you’re in the $20M–$40M range, or growing toward it, there are specific things to do before year-end.
- Compute your rolling average now, not at filing. For the 2026 tax year you need average annual gross receipts for 2023, 2024 and 2025. That’s three numbers your bookkeeping already has. Run it in September, while you still have four months to act on the answer.
- Know that “gross receipts” is broader than revenue. It generally includes total sales net of returns and allowances, plus amounts received for services and from investments — including interest, dividends, rents and royalties. Pulling the top line off your income statement can understate it.
- Aggregate related entities. The gross receipts test applies aggregation rules across commonly controlled businesses. If you run several entities under common ownership, testing them one at a time can produce the wrong answer entirely.
- Track disallowed interest as a real asset. Interest disallowed under 163(j) carries forward indefinitely. If a prior year limited some of your interest, that carryforward should be on your books and in your tax workpapers — and, as the IRS example shows, it can become fully deductible in a year you drop back under the threshold.
- Check the year before you take on debt. If you’re weighing an equipment loan or a line of credit draw, whether you’re above or below the threshold in that tax year changes the after-tax cost of the borrowing. Deductible interest at 9% is not the same expense as non-deductible interest at 9%.
- Don’t assume last year’s answer holds. The most common mistake here is treating the exemption as a permanent characteristic of the business rather than an annual test.
Frequently asked questions
What is the Section 163(j) limitation?
It caps the deduction for business interest expense at the sum of business interest income, 30% of adjusted taxable income, and floor plan financing interest. Amounts disallowed carry forward to future years.
What is the small business exemption threshold for 2026?
$32 million in average annual gross receipts over the three prior tax years (2023, 2024 and 2025). It was $31 million for 2025 and $30 million for 2024.
Can a business move in and out of the limitation year to year?
Yes. Because the test uses a rolling three-year average against an inflation-adjusted threshold, a business can be subject to the limitation in one year and exempt the next. The IRS fact sheet includes exactly that example.
What form is used to compute it?
Form 8990, Limitation on Business Interest Expense Under Section 163(j). Businesses that meet the gross receipts exemption and are not tax shelters generally do not have to file it.
Does the exemption apply to every small business?
No. A tax shelter as defined in Section 448(d)(3) cannot use the gross receipts exemption regardless of revenue.
The bottom line
FS-2026-14 doesn’t change the law — it restates a threshold that climbs quietly every year while your three-year average shifts underneath it. For most small businesses it confirms an exemption they already had. For the ones near the line, it is a September calculation with a December consequence, and the answer determines what your interest expense is actually worth on the return.
