Kingsfield · Research · Tax

Is a business's deduction for interest expense limited under the Internal Revenue Code?

Published 2026-06-23 · U.S. federal law

Section 163(j) limits the deduction for business interest expense to business interest income plus 30 percent of adjusted taxable income plus floor plan financing interest.

The answer

The cap

26 U.S.C. § 163(j) limits the deduction for business interest expense for the taxable year to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest.

Carryforward of disallowed interest

Interest disallowed by the cap is not lost. Section 163(j) treats the disallowed amount as business interest paid or accrued in the succeeding taxable year, carrying it forward indefinitely.

The judged input

What the AI drafted

Submitted to the judge

This is an excerpt from a draft tax compliance memo — the kind of work product a lawyer generates with a legal-AI drafting tool, then has to stand behind. Kingsfield does not write it; it rules on the citations the model put in it. This draft cites two authorities; one of them is wrong.

AI draft excerpt — tax compliance memo

The Company's interest expense for the year exceeds the amount currently deductible. Under 26 U.S.C. § 163(j), the deduction for business interest expense is limited to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest, with the excess carried forward. The Company should not assume the full amount is deductible as an ordinary business expense under 26 U.S.C. § 162.

The judge ruled on every citation as the draft used it — it accepted 26 U.S.C. § 163(j) and rejected 26 U.S.C. § 162. Here is why.

The verdict

How Kingsfield ruled

Ruled 2026-06-23

Each citation in the draft above was submitted to the Kingsfield judge and ruled against the primary-law corpus — Accept, Reject, or Inconclusive, per citation. These are live verdicts, not editorial. Each card shows the claim the draft made and the verbatim authority the verdict was rendered against.

Accept26 U.S.C. § 163(j)

The draft claimed: The deduction for business interest expense for a taxable year is limited to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest, with disallowed interest carried forward.

“§ 163(j)(1)(C) the floor plan financing interest of such taxpayer for such taxable year.”

Cite found; proposition supported by the cited text.

Reject26 U.S.C. § 162

The draft claimed: Section 162 is the provision that caps the deduction for business interest expense at 30 percent of adjusted taxable income.

Cite found, but the cited text does not support the claim. 26 U.S.C. 162 allows a deduction for ordinary and necessary business expenses generally; the specific limitation on business interest is at 26 U.S.C. 163(j). Regenerate with the correct authority.

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This page is legal information, not legal advice, and does not create an attorney-client relationship. The draft shown is an illustration of a typical AI answer; verdicts reflect the cited authority in the Kingsfield corpus as of the ruling date shown above.