The 2025 tax rules handed restaurant operators a significant win, and most of them don’t even know it yet.
Between equipment loans, expansion financing, real estate debt, and lines of credit, many operators are shelling out tens of thousands in annual interest payments.
But here’s the question that matters: are you actually deducting all of it?
The business interest expense deduction is an often misunderstood provision in the tax code, and the rules changed significantly in 2025.
I’ve seen too many operators leave money on the table simply because their accountant wasn’t tracking these changes. If you’re not sure how this applies to your operation, working with a restaurant-specialized tax professional can make all the difference.
Key Takeaways
- Confirm whether the 163(j) limit even applies to you. If your average gross receipts are $31M or less, you may qualify for the small business exemption and deduct 100% of your interest expense—no complex calculations required.
- Re-run your interest deduction using the restored EBITDA rules for 2025. Adding back depreciation and amortization can materially increase your allowable deduction and may finally unlock carried-forward disallowed interest from 2022–2024.
- Use equipment purchases strategically. With 100% bonus depreciation restored and depreciation now boosting ATI, timing capital investments can increase—not reduce—your allowable interest deduction.
- Evaluate how your entity structure affects interest deductions. Partnerships, S corps, and multi-entity restaurant groups treat disallowed interest differently, and aggregation rules can change whether limits apply at all.
- Model financing decisions before signing. Loan structure, interest-only periods, and refinancing timing all impact how much interest you can deduct—run projections before taking on or restructuring debt.
Understanding The Business Interest Expense Deduction
The business interest expense deduction allows companies to deduct interest paid on business-related debt, but for larger businesses, that deduction is subject to limits.
The IRS explains that the business interest expense deduction limitation caps deductible interest at 30% of a business’s adjusted taxable income (ATI), plus any business interest income and floor plan financing interest.
If your restaurant generates $500,000 in ATI, your deductible business interest would max out at $150,000. Pay more than that in interest? The excess gets disallowed for the current year and carried forward as excess business interest expense to future tax years.
The Tax Cuts and Jobs Act of 2017 created this limitation, and it hit capital-intensive businesses hard.
But don’t worry, things got better.
How The 2025 Rules Changed The Business Interest Expense Deduction
The One Big Beautiful Bill Act (OBBBA) restored a more favorable calculation method for the business interest expense deduction limitation. This applies to tax years beginning after December 31, 2024, so your 2025 taxes benefit right away. For a complete breakdown of how this legislation affects restaurants, see our One Big Beautiful Bill Act Summary.
The OBBBA brings back and makes permanent the computation of ATI using an EBITDA-based approach. From 2022 through 2024, businesses had to use an EBIT-based formula that excluded depreciation and amortization from the ATI calculation. That stricter method reduced how much interest many restaurants could deduct.
Under the restored EBITDA rules, you can add back depreciation, amortization, and depletion when calculating your ATI. A larger ATI means a higher 30% cap, which means more deductible interest.
Let me show you what this actually looks like.
A restaurant group with $1 million in taxable income, $400,000 in annual interest expense, and $200,000 in depreciation would see a meaningful difference.
- Under the old EBIT formula, the 30% limitation would allow only $300,000 in deductible interest (30% of $1 million).
- Under the restored EBITDA method, ATI increases to $1.2 million, allowing $360,000 in interest deductions. That extra $60,000 deduction stays in the business instead of going to taxes.
This change pairs well with the permanent restoration of 100% bonus depreciation under the same legislation. Higher depreciation deductions now boost your ATI rather than limiting it, creating more room for interest deductions.
Understanding how Section 179 and bonus depreciation work together can help you time capital purchases for maximum tax benefit.
Why Restaurant Operators Should Pay Attention
Running a restaurant requires serious capital. A single full-service location can cost anywhere from $500,000 to over $2 million to open, and most operators finance a significant portion of that investment. Debt fuels everything from initial buildouts to kitchen equipment upgrades to multi-unit expansion.
Think about the typical financing sources in this industry: SBA loans for buildouts, equipment financing for new ovens and refrigeration, commercial real estate mortgages, working capital lines of credit, and expansion loans for second or third locations. Every one of these carries interest expense that hits your bottom line.
The relationship between the business interest expense deduction and other tax strategies matters here too. If you’re claiming bonus depreciation on new equipment, those depreciation deductions affect your ATI calculation. Starting in 2025, that relationship works in your favor thanks to major legislative changes.
The Small Business Exemption
Before diving into complex calculations, determine whether the business interest expense deduction limitation even applies to your restaurant. Many smaller operators are completely exempt under Section 448(c), commonly called the small business exemption.
The exemption hinges on a gross receipts test. According to IRS Revenue Procedure 2024-40, for 2025, a business meets this test if its average annual gross receipts for the prior three tax years were $31 million or less. This threshold increased from $30 million in 2024 and adjusts annually for inflation. Fall below this threshold? The 163(j) limitation does not apply, and you can deduct every dollar of business interest expense without restriction.
There are important exceptions to watch. The small business exemption is not available to any business classified as a tax shelter under Section 448(d)(3). This classification can apply to:
- Certain partnerships where passive investors hold a significant ownership stake
- Restaurant groups that have brought in outside capital
- Groups structured as a syndicate
Aggregation rules can also push you over the threshold. If you operate multiple entities or are part of a controlled group, you may need to combine gross receipts across all related businesses. A three-location franchise that operates each store under a separate LLC might still exceed the $31 million limit when aggregated.
Understanding your restaurant tax obligations by entity type is critical when evaluating these rules.
Practical Strategies For Maximizing Your Deduction
Restaurant operators subject to the 163(j) limitation have several planning opportunities to consider. Here’s where I’d start.
Model the restored EBITDA Calculation
If you carried forward disallowed business interest expense from 2022 through 2024, the more favorable 2025 rules may finally create enough ATI headroom to absorb those carryforwards.
Time Your Capital Investments Strategically
Because bonus depreciation increases your depreciation deductions, and depreciation now adds back to ATI, purchasing equipment can actually increase how much interest you can deduct. Run projections before making major purchases to understand the full tax impact.
Evaluate Your Entity Structure
How your restaurant business is organized affects how 163(j) applies and how disallowed interest flows through to owners. Partnerships have particularly complex rules where excess business interest expense is allocated to partners rather than carried forward at the entity level. S corporations handle this differently, carrying the disallowed interest forward at the corporate level.
Factor These Rules Into Financing Decisions
When refinancing existing debt or taking on new loans, consider how the terms will affect your 163(j) calculation. Variable rate debt, balloon payments, and interest-only periods all influence the timing and amount of your interest expense.
Keep Documentation Organized
Form 8990 is required to calculate and report your business interest expense limitation. Track your business interest income, floor plan financing interest if applicable, and all components of your ATI calculation. Clean records make tax time smoother and support your position if questions arise later. For more year-end tax planning strategies, timing these decisions before December 31 can make a significant difference.
Capture More of Your Interest Deductions
The business interest expense deduction can put real money back in your pocket, but only if you understand how IRC 163(j) applies to your specific situation.
Not sure if your current tax strategy is capturing everything available to you? Take the free Restaurant Tax Quiz to see where you stand. When you’re ready to connect with a financial partner who knows how restaurants actually operate, we can help you find the right fit.
