• §163(j) Interest Limitation: Where Does CA Stand?

Startups, VC funds, and real estate ventures often rely heavily on borrowed capital. But the §163(j) interest deduction limitation can be a major curveball especially when state conformity rules like California’s don’t line up with the federal rules.

Let’s walk through how California treats interest expense under §163(j) , who’s impacted, and what proactive steps you should take if you’re financing your growth through debt.

What Is §163(j)?

Under the Tax Cuts and Jobs Act (TCJA), IRC §163(j) limits the amount of business interest expense that can be deducted to:

30% of adjusted taxable income (ATI) + floor plan financing + business interest income.

Key points:

• Applies to corporations, partnerships, and individuals.
• Post-2022: Depreciation and amortization are no longer added back in ATI.
• Disallowed interest can be carried forward indefinitely under federal rules.

Does California Conform to §163(j)?

No. California does NOT conform to IRC §163(j) as of 2025.

California does not limit the business interest deduction under the TCJA provision. This includes no ATI test, no 30% cap, and no special add-backs or carryforwards.

Reference:
CA Revenue & Taxation Code §24344 – California allows full deduction of interest unless explicitly disallowed under other provisions.

Who Benefits From CA Non-Conformity?

• Heavily leveraged startups in Series A–C
• Venture debt–backed SaaS companies
• Private equity structures with debt-financed acquisitions
• Real estate funds using bridge loans or LP capital stacks

Example: How CA Saves You on Tax

Example: Delta Robotics Inc.

• Federal ATI: $2M
• Business Interest Expense: $1M
• Federal §163(j) Limit (30% of ATI): $600K
• $400K disallowed federally → carried forward

But for California:

• Entire $1M is fully deductible  under RTC §24344.
• The difference: $400K * 8.84% = $35,360 in CA tax savings.

IRS and FTB Forms to Know

Compliance Steps for California Taxpayers

1. Calculate Federal Limitation
   Use Form 8990 to compute allowable and disallowed interest expense.
2. Do NOT apply 30% cap for CA
   Ignore federal carryforwards and disallowances on your CA return.
3. Adjust CA taxable income accordingly
   Subtract the disallowed interest from federal taxable income when preparing CA Form 100, 565, or 540.
4. Keep reconciliations clear
   Attach a reconciliation worksheet in corporate tax filings showing the differences between federal and CA rules.
5. Document loan purpose & use
   Ensure debt is used for bona fide business activities and not passive investments.

Conclusion

California’s non-conformity with §163(j) is a tax-saving advantage for founders and CFOs dealing with heavy interest expenses. But the mismatch with federal rules creates a complex compliance split that needs proactive documentation and accurate reconciliations.

Call to Action

Need help reconciling your federal and state interest deductions?

Anshul Goyal, CPA EA FCA is a licensed U.S. Certified Public Accountant and Enrolled Agent authorized to represent before the IRS, with deep expertise in California corporate tax strategy, cross-border compliance, and high-growth startups.

Book a meeting with Anshul today to maximize your CA tax efficiency.

Disclaimer

This article is for informational purposes only. It does not constitute legal or tax advice. Laws may change, and tax treatment varies by circumstance. Please consult a licensed professional for advice on your unique situation.

FAQs

1. Is interest deduction capped in California like under §163(j)?
   No. California does not conform to IRC §163(j); it allows full deduction of business interest.
2. Do I still need to file Form 8990?
   Yes, for federal taxes. For California, there’s no equivalent limitation or form.
3. What if I have carryforward interest from federal?
   You can’t deduct that in California, since CA never disallowed it in the first place.
4. Are all types of interest fully deductible in CA?
   Most business interest is, but exceptions exist (e.g. related-party or passive activity interest).
5. Does this difference apply to S-Corps and partnerships too?
   Yes. All California entities ignore §163(j) limits unless future law changes.

About Our CPA

Anshul Goyal, CPA EA FCA specializes in helping tech founders, international businesses, and venture-backed startups navigate complex state and federal tax issues. With over a decade of experience, he represents clients in IRS disputes, optimizes multi-state tax strategies, and advises on entity structures for funding and exit readiness.

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Learn how California treats IRC §163(j) . Discover why startups and founders benefit from non-conformity and how to stay compliant while optimizing your interest deductions.

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