Form 8990: Most Reliable Overview

Step By Step Guide On Form 8990-Unlock The Detailed Synopsis

IRS Form 8990, known as “Limitation on Business Interest Expense Under Section 163(j),” is used by eligible taxpayers to compute and report the portion of business interest expense that can be deducted in accordance with the restrictions outlined in IRC Section 163(j). This limitation was significantly expanded under the Tax Cuts and Jobs Act (TCJA) of 2017, which now generally limits business interest expense deductions to 30% of Adjusted Taxable Income (ATI), plus business interest income and floor plan financing interest.

Purpose of IRS Form 8990

The primary purpose of IRS Form 8990 is to calculate, report, and track limitations on the deductibility of business interest expense under Internal Revenue Code (IRC) Section 163(j). Introduced under the Tax Cuts and Jobs Act (TCJA) of 2017, this limitation was designed to restrict the amount of interest that businesses—especially those with high leverage—can deduct on their federal income tax returns.

Section 163(j) was modified by the Tax Cuts and Jobs Act (TCJA) and further amended by the CARES Act. The rule is intended to limit excessive interest deductions that might reduce taxable income. Form 8990 helps businesses accurately determine the allowable business interest deduction, which is generally capped at the total of specified thresholds set under IRC Section 163(j):

• Business interest income
• 30% (or 50% under temporary rules) of Adjusted Taxable Income (ATI)
• Floor plan financing interest (if applicable)

Key Objectives of Form 8990

1. To Apply the Section 163(j) Limitation
   • The form determines how much of a taxpayer’s business interest expense is deductible in a given tax year.
   • Any excess (disallowed) interest that cannot be deducted must be reported and carried forward for use in future years.
2. To Ensure Proper Allocation in Pass-Through Entities
   • Partnerships and S corporations are required to prepare Form 8990 at the entity level to report and determine any limitations on business interest deductions under Section 163(j).
   • The form calculates and reports Excess Taxable Income (ETI), Excess Business Interest Income (EBII), and disallowed business interest, which are then allocated to partners or shareholders via Schedule K-1.
   • It ensures that each owner receives the correct share of deductible and non-deductible interest.
3. To Report Prior Year Carryforwards
   • If business interest expense was disallowed in prior years (due to the limitation), Form 8990 is used to track and apply those carryforward amounts in subsequent tax years.
4. To Maintain IRS Compliance
   • By reconciling interest deductions with the statutory limit, the form helps prevent the overstatement of deductions, which could otherwise lead to IRS audits, underpayment penalties, or compliance violations.
   • It provides the IRS a uniform method to monitor which taxpayers are subject to the limitation and how the limitation is calculated.

Example Scenario of Purpose in Action:

Let’s say a partnership has $600,000 of business interest expense but only $1,200,000 in adjusted taxable income. Under Section 163(j), it can only deduct $360,000 (30% of ATI), meaning $240,000 is disallowed. On Form 8990, this $240,000 is reported as disallowed and carried forward, and the partners are informed via Schedule K-1. This form makes sure each piece is reported correctly to both the IRS and the partners for future use.

Who Must File IRS Form 8990?

Taxpayers affected by the business interest expense limitation rules under IRC Section 163(j), as introduced by the Tax Cuts and Jobs Act (TCJA), are required to file IRS Form 8990 to report and calculate their allowable interest deductions. This form is used to calculate the amount of business interest expense a taxpayer can deduct in the current tax year and to track any disallowed interest carried forward.

1. Applicable Taxpayers Required to File Form 8990

Form 8990 is required if the taxpayer:

• Has business interest expense and is not exempt from §163(j) limitations.
• Is part of a consolidated group, partnership, or S corporation that has:
  • Business interest expense,
  • Business interest income,
  • Floor plan financing interest, or
  • Adjusted taxable income (ATI).

2. Businesses Required to File

• Corporations, including C corporations that are not small businesses under §163(j)(3).
• Partnerships and LLCs taxed as partnerships—must file Form 8990 even if the business interest limitation doesn’t apply, as the form also facilitates partner-level carryforward reporting.
• S Corporations, which file the form to compute deductible business interest and pass relevant figures to shareholders via Schedule K-1.
• Individuals, estates, and trusts with business interest expenses from pass-through entities must also include Form 8990.

3. Entities Specifically Exempt From Filing

Some small businesses with average annual gross receipts of $30 million or less (for tax years starting after 2023), measured over the previous three years, may be exempt from filing Form 8990. However, this exemption does not apply if certain conditions are met, such as being classified as a tax shelter or failing other eligibility criteria:

• The taxpayer is a tax shelter under IRC §448(d)(3).
• The taxpayer is part of a consolidated group exceeding the threshold in aggregate.
• The taxpayer elects out of bonus depreciation under §168(k), in which case §163(j) limitations apply regardless of income level.

4. Special Rules for Partnerships

Partnerships:

• Must compute and report both deductible and non-deductible business interest expense at the entity level.
• Allocate any excess business interest expense (EBIE), excess taxable income (ETI), and excess business interest income (EBII) to partners or shareholders for reporting on their individual returns.
• Partners cannot deduct disallowed interest unless they have sufficient ETI allocated from the partnership in a future year.

5. S Corporations

• File Form 8990 to compute interest deduction at the corporate level.
• Unlike partnerships, disallowed interest is retained by the S corporation and carried forward at the entity level (not passed to shareholders).

6. Electing Real Property and Farming Businesses

Businesses that elect out of §163(j) (e.g., electing real property trades or businesses or farming businesses) must not file Form 8990, but they must:

• Attach an election statement to their return.
• Apply the Alternative Depreciation System (ADS) when required for certain property types or business entities.

Who Is Exempt from Filing Form 8990?

Not all taxpayers are subject to the business interest expense limitations under IRC §163(j). The IRS offers specific exclusions for qualifying small businesses and certain electing trade or business entities from the Section 163(j) interest deduction limitation. If a taxpayer qualifies for one of these exemptions, they are generally not required to file Form 8990.

1. Small Business Exemption

A business is exempt from §163(j) and therefore exempt from filing Form 8990 if it qualifies as a small business taxpayer under IRC §448(c).

Criteria:

• The business must have average annual gross receipts of $30 million or less (for tax years beginning in 2024 and beyond; the threshold was $25 million for earlier years).
• The calculation relies on the average gross receipts from the prior three tax years.

Important Conditions:

• The gross receipts test applies to the entire controlled group or affiliated service group. Businesses that are part of a controlled group are required to combine their gross receipts to determine eligibility for the small business exemption.
• This exemption does not apply to tax shelters, even if they meet the gross receipts threshold.

2. Real Property Trade or Business (RPTOB) Election

Taxpayers engaged in a real property trade or business may elect to opt out of the §163(j) limitation.

Who qualifies:

• Businesses involved in real property development, construction, rental, management, leasing, or brokerage.

Caveats:

• Electing businesses must use the Alternative Depreciation System (ADS) for certain property, which can increase taxable income in the short term.
• Once made, this election is irrevocable.

3. Farming Business Election

Qualified farming businesses can also elect out of §163(j) limitation rules.

Who qualifies:

• Businesses engaged in the trade or business of farming, including agricultural or horticultural cooperatives.

Similar to RPTOB:

• Making the election requires the taxpayer to use the Alternative Depreciation System (ADS) for specified farming property.
• The election is irrevocable.

4. Taxpayers With No Business Interest Expense

Form 8990 is only necessary if a taxpayer has business interest expense, business interest income, or related adjustments like floor plan financing interest. Taxpayers without any of these items are generally not required to file the form.

5. Sole Proprietors and Pass-Through Entities (If Exempt)

Even though Schedule C filers (sole proprietors) and pass-through entities like partnerships or S corporations normally calculate QBI and other business items, they are exempt from Form 8990 if:

• They qualify under the small business exemption.
• They have elected out of §163(j), or
• They have no applicable business interest deductions.

Form 8990 Instructions – In-Depth Structural Guide

IRS Form 8990, “Limitation on Business Interest Expense Under Section 163(j)”, is used by taxpayers to compute the amount of deductible business interest expense and to report any disallowed or excess interest expense to be carried forward. This form plays a critical role for corporations, partnerships, and individuals subject to §163(j) of the Internal Revenue Code, especially in the context of high-interest leverage, mergers, acquisitions, or debt restructuring.

Form 8990 is structured to accommodate different taxpayer types, including C corporations, individuals, partnerships, and S corporations, and includes multiple sections to track current-year and carryforward limitations.

Part I — General Information and Applicability

This opening section is where the taxpayer identifies their entity classification and discloses whether they are subject to the §163(j) limitation. It captures:

• Name and EIN
• Tax year information
• Entity status (e.g., C corporation, partnership, S corporation)
• Whether the taxpayer:
  • Is exempt under the small business exemption (average annual gross receipts ≤ $29 million for 2025)
  • Elected out of §163(j) under a real property or farming trade or business
  • Is a partner in a partnership or shareholder of an S corporation
  • Is filing Schedule B to pass through items to owners

Purpose: Establishes whether the taxpayer is subject to §163(j) and if detailed limitation calculations are required.

Part II — Computation of §163(j) Limitation

This is the heart of Form 8990, where the business interest deduction limitation is determined using actual financial figures and statutory thresholds. It requires the following information:

• Line 1–3: Enter the total amount of:
  • Business interest income
  • Floor plan financing interest (fully deductible)
  • Disallowed interest carried forward from prior year(s)
• Line 4–6: Compute Adjusted Taxable Income (ATI):
  • ATI is the entity’s taxable income before deductions for interest, depreciation, amortization, NOLs, and certain other items (per §163(j)(8))
  • For tax years starting before January 1, 2022, taxpayers could add back depreciation and amortization when calculating Adjusted Taxable Income (ATI); however, these adjustments are no longer permitted starting in 2025
• Lines 7–10: Determine the maximum deductible business interest expense allowed under the Section 163(j) limitation:
  • 30% of ATI, unless special rules apply (e.g., COVID-19 relief for 2019/2020)
  • Add any business interest income and floor plan financing to determine total limitation
  • Compare with actual business interest expense
  • Excess is disallowed and carried forward

Purpose: Determines the allowable business interest deduction and any disallowed portion for the year.

Part III — Summary for Non-Pass-Through Taxpayers

Completed only by C corporations, individuals, trusts, or any entity not treated as a pass-through, this section summarizes:

• The allowable business interest deduction (to be taken on the taxpayer’s return)
• The amount of disallowed business interest expense to carry forward to future years

Purpose: Provides a final reportable deduction for the tax return and disallowed amount for tracking.

Part IV — Summary for Partnerships and S Corporations

his part is completed exclusively by partnerships and S corporations to report and allocate interest-related items to their partners or shareholders:

• Report total business interest expense and how much was allowed/disallowed
• Determine how much Excess Taxable Income (ETI) and Excess Business Interest Income (EBII) will be passed through
• Indicate each partner’s/shareholder’s share of the §163(j)-related items via Schedule K-1

Purpose: Passes through limitations and adjustments to owners, allowing them to apply the limits at the individual level.

Schedule A — Disallowed Interest Expense Carryforward

This supporting schedule reports disallowed business interest expense that originated in prior tax years and is being carried forward:

• Tax year of origin
• Amount disallowed that year
• Portion used this year
• Remaining balance to be carried forward

Purpose: Facilitates proper tracking of deferred interest expenses, helping maintain clear records for audit and compliance purposes.

Schedule B — Detailed Pass-Through Reporting

Applicable only to partnerships and S corporations, this schedule is used to report detailed components for partner/shareholder allocation, including:

• Each owner’s share of:
  • Business interest income
  • Business interest expense
  • Excess taxable income (ETI)
  • Excess business interest income (EBII)
  • Disallowed business interest

These components are reflected on Schedule K-1, and required for the owner’s own Form 8990 filing.

Purpose: Distributes §163(j)-related items to the correct owners for inclusion on their tax returns.

How to Calculate IRS Form 8990 (Limitation on Business Interest Expense)

IRS Form 8990 is used to calculate the limitation on the deductibility of business interest expense based on Adjusted Taxable Income (ATI) under IRC §163(j). It also helps determine any disallowed interest that must be carried forward to future years.

Step-by-Step Calculation Process

Step 1: Determine Whether You’re Subject to §163(j)

You must calculate Form 8990 if:

• Your business does not qualify for the small business exemption because average gross receipts exceed $29 million for tax year 2025.
• You are a C corporation, partnership, S corporation, or trust with business interest expense.
• You haven’t elected out as a real property or farming trade or business.

Step 2: Identify Key Components

You’ll need the following values:

Component	Description
Business Interest Expense (BIE)	Interest paid or accrued on business debt.
Business Interest Income (BII)	Interest income earned from business activities.
Floor Plan Financing Interest	Special deductible interest on inventory financing (for vehicle dealers).
Disallowed Interest from Prior Years	Interest disallowed in past years and carried forward.
Adjusted Taxable Income (ATI)	Modified taxable income that limits the interest deduction.

Step 3: Calculate Adjusted Taxable Income (ATI)

For tax year 2025, ATI is taxable income adjusted by adding back:

• Business interest expense
• Net operating losses (NOLs)
• Qualified business deductions
• Depreciation, amortization, and depletion are no longer added back to Adjusted Taxable Income (ATI) for tax years after 2021

ATI Formula:

ATI = Taxable Income

     + Interest Paid on Trade or Business

      + NOL deduction

     + Section 199A deduction (QBI)

     ± Other adjustments (depending on entity type)

Step 4: Calculate the Interest Deduction Limit

The §163(j) limitation is the sum of:

Limit = 30% of ATI

      + Business Interest Income

      + Floor Plan Financing Interest (if any)

Note:

For most taxpayers, only 30% of ATI + BII is deductible.

Step 5: Compare Deductible Limit to Business Interest Expense

Now compare:

If BIE ≤ Limit → Full deduction allowed.

If BIE > Limit → Excess is disallowed and carried forward.

Example (Corporation)

• Taxable Income: $500,000
• Business Interest Expense: $150,000
• Business Interest Income: $10,000
• No NOL or floor plan interest

Calculate ATI:

ATI = $500,000 + $150,000 = $650,000

Calculate 30% of ATI:

30% × $650,000 = $195,000

Deduction Limit:

$195,000 + $10,000 (BII) = $205,000

Compare to Expense:

BIE ($150,000) < Limit ($205,000) → Full deduction allowed

No disallowed amount → Nothing carried forward.

Example (Partnership – Disallowed Interest)

• ATI: $400,000
• BIE: $150,000
• BII: $0

30% of ATI = $120,000

Deductible:

$120,000 → deductible
$30,000 → disallowed → carry forward on Schedule A

This $30,000 will be allocated to partners via K-1 and carried forward by them individually.

Where to Report on Form 8990

Section	Purpose
Part I	State whether §163(j) applies and entity status
Part II	Do the full calculation for interest limitation
Part III/IV	Summarize results: deduction allowed and amount disallowed
Schedule A	Report and track disallowed interest carryforwards
Schedule B	Pass-through entity reporting (K-1 allocation details)

General Deadline to File Form 8990

Form 8990 does not have its own standalone due date. Instead, it must be filed as part of your annual income tax return package. This means your Form 8990 deadline is the same as the tax return it’s attached to.

1. Individuals (Form 1040)

• Deadline: April 15 (for calendar year filers)
• Who It Applies To: Individuals who have ownership in pass-through entities (like partnerships or S corporations) and must include Form 8990 because they receive K-1s showing interest deductions subject to limitation.
• Extension: File Form 4868 to extend the deadline to October 15.
• Key Point: The QBI deduction or any pass-through business interest limitation will be finalized on the extended return with Form 8990 attached.

2. Partnerships (Form 1065)

• Deadline: March 15 (for calendar year partnerships)
• Who Must File: Partnerships with business interest expense that must be allocated among partners, even if §163(j) doesn’t limit the deduction at the partnership level.
• Extension: File Form 7004 to extend the deadline to September 15.
• Key Point: Form 8990 must be attached to the return and cannot be filed late or separately. Failure to include may delay partner deductions.

3. S Corporations (Form 1120-S)

• Deadline: March 15 (for calendar year S corps)
• Who Must File: S corporations that incur business interest expense and pass limitations or disallowed amounts through to shareholders.
• Form 7004 Grants a 6-Month Extension to September 15.
• Key Point: Schedule K-1s issued to shareholders must reflect interest limitation allocations derived from Form 8990.

4. C Corporations (Form 1120)

• Deadline: April 15 (for calendar year-end C corporations)
• Who Must File: Any C corporation with interest deductions subject to IRC §163(j), especially those with significant debt financing.
• Extension: File Form 7004 to extend the deadline to October 15.
• Key Point: The corporation itself calculates and reports the limitation on Form 8990 and applies it to its taxable income.

5. Fiscal-Year Filers

• Deadline: Return Due on the 15th Day of the Third Post-Year-End Month.
• Example: A C corporation with a fiscal year ending June 30 must file by September 15.
• Extension: Six months from the original due date if Form 7004 is filed.
• Key Point: Form 8990 aligns with the fiscal tax return cycle and must be submitted along with the return.

6. Pass-Through Entity Owners (Receiving Schedule K-1)

• Who Must Include Form 8990: Owners who are not exempt from §163(j) and must include their allocated business interest on Form 8990.
• Deadline Tied To: Their individual return (usually Form 1040) or entity-level return if they’re a corporation or another partnership.
• Key Point: Even if the pass-through entity isn’t limited, the owner might be—requiring a separate Form 8990 at the owner level.

7. Extension Filers (Across All Entity Types)

• Extension Forms:
  • Form 4868 – Individuals
  • Form 7004 – Partnerships, S corps, C corps
• Extension Periods:
  • Individuals: 6 months (to October 15)
  • Business entities: 6 months (varies by form)
• Key Point: Filing an extension automatically extends Form 8990, since it must be attached to the final tax return. No separate extension is needed for the form itself.

Penalties for Noncompliance with Form 8990

Filing IRS Form 8990 is not optional for applicable taxpayers. It is mandatory if you are required to report or calculate business interest expense limitations under IRC §163(j). Noncompliance can lead to serious consequences:

1. Disallowance of Business Interest Deduction

• Primary Penalty: If Form 8990 is not filed, or is incomplete, the IRS will not allow the deduction for business interest expense in that tax year.
• Effect: Your taxable income increases, which raises your income tax liability.
• No Retroactive Claim: Even if the expense was otherwise valid, you may lose the deduction permanently unless you file an amended return (and only if the statute of limitations allows it).

2. Underpayment of Tax Penalty

• Trigger: If the omission of Form 8990 causes an underreported tax liability, you may be subject to penalties under IRC §6662.
• Rate: Typically 20% of the underpayment amount.
• Types of Errors That Trigger This:
  • Negligence
  • Substantial understatement of income tax
  • Failure to properly calculate ATI (Adjusted Taxable Income) or the §163(j) limitation
• Relief: Reasonable cause defenses may be accepted only if you can demonstrate a good-faith effort and proper documentation.

3. Late Filing Penalties (for the Tax Return Itself)

Form 8990 is not filed separately—it must be attached to the entity’s timely filed tax return. Missing Deadlines Can Lead to Penalties for Incomplete Returns Including Form 8990.

For Partnerships (Form 1065) and S Corporations (Form 1120-S):

• 2025 Penalty: $235 Monthly per Owner, Max 12 Months.
• Applies if: The entire return, including Form 8990, is late or incomplete.

For C Corporations (Form 1120):

• Penalty: 5% of unpaid tax per month, up to 25%.
• Interest: Accrues daily on any unpaid tax balance.

4. Late Payment Penalty

• Late Payment Penalty: 0.5% Monthly Up to 25% Total.
• When it Applies: If Form 8990 causes you to adjust your interest deduction and you owe more tax, this penalty may apply if the tax isn’t paid by the original due date.

5. Interest on Penalties and Unpaid Tax

• Interest: Unpaid Tax Accrues Daily Interest from Due Date Onward.
• IRS Rate: Changes quarterly (e.g., 8% annually in some recent quarters).
• Impact: Significantly increases total liability if not addressed quickly.

6. Risk of Audit

Failure to file Form 8990 when required raises a red flag for the IRS. It is one of the top triggers for:

• Examinations of pass-through entities
• Partnership audits under the BBA centralized rules
• Request for additional substantiation of deductions

7. Penalties for Material Misstatements

If you misreport ATI, the §163(j) limitation, or improperly allocate interest across related entities or tiers:

• You may be subject to accuracy-related penalties
• This includes Intentional Disregard of Rules (up to 75% penalty on tax underpayment in egregious cases)

Conclusion

Form 8990 is a critical compliance document for businesses subject to the §163(j) limitation on business interest deductions. Properly calculating allowable interest expense and reporting disallowed amounts ensures accurate tax filing and minimizes audit risks. Businesses—especially partnerships and S corporations—must stay current on §163(j) rules and ensure partners/shareholders receive accurate pass-through data.

Frequently Asked Questions (FAQs)