TL;DR: You can only deduct business interest up to 30% of (roughly) EBITDA each year. Anything over the cap carries forward.

Leveraged buyouts run on debt, and debt runs on deductible interest. Section 163(j) caps that deduction at business interest income + 30% of “adjusted taxable income” (ATI). For tax years beginning after 2024, ATI is back to an EBITDA-style measure — depreciation and amortisation are added back again — which made the cap much looser for capital-heavy businesses than it was in 2022–2024.

Disallowed interest isn't lost; it carries forward indefinitely. Smaller businesses under a gross-receipts threshold are exempt, and real estate businesses can elect out in exchange for slower depreciation. In a partnership the test is run at the partnership level and excess amounts are pushed out to partners — which is why your K-1 may carry a line about it.

Section 163(j) cap in actionATI of $10m gives a 30% cap of $3m; of $5m of interest, $3m is deducted and $2m carries forward.ATI (≈ EBITDA)$10mInterest paid$3m ✓$2m →30% cap = $3mdeducted this yearcarried forward
The cap is 30% of ATI. Interest above the line waits for a better year.

Worked example

A portfolio company has ATI of $10m and pays $5m of interest on its acquisition debt. It deducts $3m this year; the other $2m carries forward. If EBITDA grows to $20m next year, the cap rises to $6m and some of the carried-forward interest can be used.

Where you'll see it: Buyout models (tax line), Form 8990, and the “excess business interest expense” box on partnership K-1s.

Code: IRC § 163(j); Form 8990 · Related: Thin cap, Schedule K-1 (and K-3)

Full explainer: EBITDA vs EBIT →

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This glossary is general information, simplified for learning. It is not tax, legal or investment advice, and real structures turn on facts and documents not shown here.