Same Bill, Second Page, Opposite Direction

Every CPA newsletter this year said the same thing. EBITDA is back. More interest is deductible. Pop the champagne.

Sure.

Same bill. Second page. Different date. Opposite direction. Nobody connected the two.

Here's how the pipe works. Section 163(j) of the tax code caps how much business interest you can deduct each year. The cap is 30% of your income. For a few years, the IRS measured that income using the stingier EBIT formula. Less income in the formula means a lower cap. A lower cap means less interest you can write off.

The One Big Beautiful Bill, signed July 4, 2025, switched the formula back to EBITDA. That adds depreciation back into the number. A business earning $500,000 with $200,000 in depreciation just saw its cap jump from $150,000 to $210,000. That's $60,000 more in deductible interest. Real money. Good news.

That was the first hand.

Now. Developers and builders had a workaround for years. If the cap blocked your interest deduction, you didn't just eat the loss. You stuffed the interest into the building itself.

You took the interest expense. You called it a construction cost. You capitalized it into the asset. The interest left one bucket and landed in another. The 163(j) cap never saw it. It wasn't "interest" anymore. It was "cost of goods sold." Or "depreciable asset." Poof.

Builders did this. Manufacturers did this. Anyone with heavy construction debt and a decent tax lawyer did this.

Look. Same bill. Section 70341. For tax years starting after December 31, 2025, the 163(j) cap applies before you can stuff anything anywhere.

The valve shuts upstream. Your interest hits the cap first. Then, and only then, can you capitalize what's left. The trick is dead. Grant Thornton called it "terminated."

One hand gave. The other took.

Right.

Here's where the pipe gets weird. Bloomberg Tax ran the numbers on a developer. The cap sits at $100. The developer has two pools of interest. Pool one: $10 in regular interest expense. Pool two: $150 in interest tied to construction.

Under the old rules, only pool one hit the cap. Pool two slipped past. Under the new rules, both pools feed into the same cap. And the capitalized interest eats first. That $150 walks up to the $100 cap and swallows it. $100 of the construction interest gets capitalized. The cap is gone. Zero left.

Now pool one shows up. The regular $10 in interest. No cap remaining. Blocked. All of it. Then the leftover $50 from pool two. Also blocked.

I mean.

The blocked interest doesn't vanish. It doesn't stay a construction cost. It changes species. It becomes an interest expense carryforward. A phantom line item that sits on your books. It grows every year if you keep borrowing heavy. And for a developer mid-project, you always keep borrowing heavy.

The second hand is bigger than the first.

Tax year 2025 was the last year you could use the old trick. That window closed.

One move remains. The IRS released Rev. Proc. 2026-17. It lets real estate businesses withdraw elections they made years ago. The ones where you traded slower depreciation for bigger interest deductions. Basically a do-over. The deadline is October 15, 2026. After that, the pipe is what it is.

If your business pulls in more than $32 million a year, the cap applies. Your personal shop may be small. But that real estate fund you hold a piece of? The partnership where you're a limited partner collecting K-1s? Probably not small. The cap hits at the entity level. Your exposure follows your investment.

(And if you operate in California, Michigan, or Pennsylvania, those states don't follow the federal rules. A second layer of math your CPA gets to bill for.)

Everybody read the headline. EBITDA is back. More deductions.

Nobody read page two. Same bill. Second date. The workaround that builders used for years just died. The blocked interest doesn't disappear. It mutates. It accumulates.

Read the second date.