EBITDA-Based Deductions Return Under Section 163(j) Reform

One of the most significant tax changes introduced in the One Big Beautiful Bill Act (OBBBA) is the permanent reinstatement of depreciation, amortization, and depletion addbacks when calculating Adjusted Taxable Income (ATI) under Section 163(j). This change restores the interest limitation rules to an EBITDA-based based model, enabling businesses to deduct a greater portion of their interest expense.

Effective for tax years beginning after December 31, 2024, this update reverses the 2022 shift that restricted deductions to 30% of EBIT (excluding depreciation and amortization). For capital-intensive sectors such as real estate and construction, the return to an EBITDA framework can substantially increase deductible interest and lower overall tax liabilities.

Real estate businesses have traditionally relied on the Real Property Trade or Business (RPTB) election to bypass the interest deduction limitations under Section 163(j). While this election removes the cap on interest deductions, it also requires the use of the slower Alternative Depreciation System (ADS) for certain property, which can reduce overall depreciation benefits.

However, with the expanded definition of Adjusted Taxable Income (ATI), the advantage of the RPTB election may be diminishing. Businesses should reassess their position by modeling both scenarios, continuing the election versus reverting to standard depreciation rules to determine which approach yields a more favorable tax outcome.

Construction firms and property developers frequently rely on substantial debt to fund their projects. The reinstated interest deductibility under the updated regulations enhances cash flow forecasts and boosts after-tax return on leverage transactions. These changes may also influence how new projects are structured, especially when involving pass-through entities or partnerships with layered financing arrangements.

Understanding the impact of Section 163(j) revisions on your financing structure, depreciation strategies, and overall tax planning is critical. At CSH, we assist clients in evaluating RPTB elections, modeling ATI thresholds, and navigating compliance with confidence. Our team brings extensive experience in advising construction and real estate businesses on how to optimize tax outcomes in response to evolving legislation.