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Business Interest Expense Deduction Limitations for Partnerships and Their Partners

January 31, 2023

Transactions involving the disposition of partnership property or partnership interests can trigger rules that limit business interest expense deductions. Section 163(j) of the Internal Revenue Code generally limits the deductibility of a partnership’s business interest expense (BIE) to an amount equal to its business interest income (BII) and 30% of its adjusted taxable income (ATI). Many taxpayers may be familiar with the timing provision that allowed a beneficial addback (the “Addback”) to ATI for depreciation, depletion, and amortization (DD&A) during the 2018 through 2021 tax years. However, taxpayers may be less familiar with the requirement that ATI be reduced by the Addback if the partnership disposes of its property or a partner disposes of their partnership interest.

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