TITLE: IRS Updates Section 163(j) Business Interest Deduction: What International Ecommerce Sellers Need to Know for 2026
The IRS has updated its guidance on the US business interest deduction. The changes matter if your international business has a US LLC, C corporation, controlled foreign corporation, or US trade or business with interest costs.
This update is especially relevant to UK ecommerce sellers, Amazon FBA brands, cross-border digital businesses, and us importers of record managing US inventory, warehouses, or financing.
Check your 2026 interest deduction before filing
On 19 August 2026, the IRS published Fact Sheet FS-2026-14, updating its frequently asked questions on the section 163(j) business interest expense limitation.
The new fact sheet supersedes FS-2025-09, published on 23 December 2025. It reflects changes and clarifications introduced by the One, Big, Beautiful Bill Act.
Section 163(j) generally limits the amount of business interest expense you can deduct for a tax year. The maximum deduction is the total of:
- Your business interest income.
- 30% of adjusted taxable income (ATI).
- Floor plan financing interest expense.
Any business interest that you cannot deduct is carried forward to the next tax year. The carryforward may remain limited if section 163(j) continues to apply.
This is why accurate bookkeeping matters. Your tax calculation depends on correctly separating interest income, interest expense, depreciation, amortisation, depletion, and other ATI adjustments.
Confirm whether your business qualifies for the small business exemption
A business may generally be exempt from section 163(j) if it meets the gross receipts test and is not a tax shelter.
The base threshold is average annual gross receipts of $25 million or less over the previous three tax years. The inflation-adjusted thresholds are:
- 2024 tax year: $30 million.
- 2025 tax year: $31 million.
- 2026 tax year: $32 million.
Do not assess this threshold using only your US marketplace sales. You may need to consider the relevant gross receipts of related entities and controlled groups.
For example, a UK parent company, US corporation, and related Canadian corporation may require a wider review than the US entity’s Amazon settlement reports alone.
Keep your group structure, ownership records, and revenue calculations together. This will support the exemption analysis and reduce the risk of an incorrect federal return.
Recalculate ATI under the 2026 rules
The updated IRS FAQs highlight two important ATI changes.
Add back depreciation, amortisation, and depletion again
For tax years beginning after 31 December 2024, depreciation, amortisation, and depletion deductions are added back when calculating ATI.
This can increase ATI and therefore increase the 30% interest limitation. However, the effect depends on your full tax computation and the relevant deductions.
Your ecommerce bookkeeping should clearly identify:
- Warehouse and fulfilment equipment.
- Computer hardware and software costs.
- Capitalised development expenditure.
- Leasehold improvements.
- Depreciation and amortisation entries.
- Interest paid on loans, credit facilities, and shareholder funding.
Exclude certain CFC income inclusions
For tax years beginning after 31 December 2025, a US shareholder’s controlled foreign corporation income inclusions under sections 951(a), 951A(a), and 78 are excluded from ATI.
The associated deduction portions are also addressed by the new rule.
In practical terms, a US shareholder can no longer increase ATI by including these CFC income amounts. This may reduce the available section 163(j) limitation for some international structures.
If your US entity owns or is treated as a US shareholder of a foreign corporation, review the calculation before preparing the 2026 return. Do not rely on older assumptions that CFC inclusions automatically increase ATI.
Understand how the rules apply to foreign businesses
Section 163(j) is not limited to domestic US corporations.
The IRS confirms that the rules can apply to:
- Foreign corporations that are CFCs.
- Foreign corporations engaged in a US trade or business.
- Other foreign persons engaged in a US trade or business.
- CFCs that are partners in partnerships.
- CFC groups where the relevant group rules apply.
For a CFC, section 163(j) generally applies in a similar manner to a domestic C corporation. A CFC group election may allow a single limitation to be calculated for the group.
For a foreign corporation engaged in a US trade or business, proposed Treasury Regulation section 1.163(j)-8 coordinates the rules with income that is effectively connected with the US trade or business.
This can affect a UK company selling into the United States through:
- A US warehouse or fulfilment provider.
- A US branch or fixed business operation.
- A US entity that borrows to fund inventory.
- A US marketplace structure with related-party financing.
- A US subsidiary receiving funding from its UK parent.
Your structure and tax classification will determine the filing treatment. Maintain entity-level records rather than combining every country’s income and expenses into one spreadsheet.
Worked example: UK Amazon seller with a US entity
Assume a London-based ecommerce brand sells through Amazon US. It operates through a US corporation and uses fulfilment locations in Texas and California.
For the 2026 tax year, the US corporation has:
- Business interest expense: $50,000.
- Business interest income: $2,000.
- Adjusted taxable income before the 30% calculation: $100,000.
- Floor plan financing interest: $0.
The section 163(j) limitation is:
- Business interest income: $2,000.
- 30% of ATI: $30,000.
- Floor plan financing interest: $0.
- Maximum deductible business interest: $32,000.
The result is:
- Total interest expense: $50,000.
- Deductible interest: $32,000.
- Disallowed interest carried forward: $18,000.
This is an illustration only. The actual result could change after considering the gross receipts exemption, CFC rules, partnership rules, related entities, capitalisation rules, and the full ATI computation.
If the company also has relevant depreciation or amortisation deductions, those may be added back to ATI for a tax year beginning after 31 December 2024. That could increase the deduction limit.
However, if the structure involves CFC income inclusions for a tax year beginning after 31 December 2025, those inclusions may no longer increase ATI.
Separate federal interest rules from state sales tax
Section 163(j) concerns the federal deduction for business interest expense. It does not replace state sales tax compliance.
An Amazon or Shopify seller may still need to review sales tax obligations in states such as:
- New York.
- Texas.
- California.
Marketplace facilitator rules may mean Amazon calculates and collects sales tax on certain transactions. You may still need to register, file returns, report marketplace sales, or manage direct Shopify and WooCommerce transactions.
Your warehouse locations also remain important. Inventory stored in Texas or California may affect state compliance even where the federal interest calculation is handled separately.
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