Uncertainty regarding inflation, demand and foreign tariffs has made inventory management even harder for businesses than it was previously. Although there are many unknowns right now, one thing is generally certain: Carrying excess inventory is expensive. If you’d like to trim your buffer stock and maximize profitability, there are effective ways to do it without risking customer service.
Count and compare
Inventory management starts with a physical inventory count. Accuracy is essential for knowing your cost of goods sold and for identifying and resolving discrepancies between your physical count and perpetual inventory records. An external accountant can bring objectivity to the counting process and help minimize errors.
The next step is to compare your inventory costs to those of your peers. Trade associations often publish benchmarks for gross margin [(revenue – cost of sales) / revenue], net profit margin (net income / revenue) and days in inventory (average inventory / annual cost of goods sold × 365 days).
Your company should strive to meet — or beat — industry standards. For a retailer or wholesaler, inventory is simply purchased from the manufacturer. But the inventory account is more complicated for manufacturers and construction firms where it’s a function of raw materials, labor and overhead costs.
Guide to cutting
The composition of your company’s cost of goods will guide you on where to cut. You may be able to reduce inventory expenses by renegotiating prices with your suppliers or seeking new vendors. And don’t forget the carrying costs of inventory, such as storage, insurance, obsolescence and pilferage. Brainstorm ways to mitigate such threats and improve margins. For example, you might negotiate a net lease for your warehouse, install antitheft devices or opt for less expensive insurance coverage.
To lower your days-in-inventory ratio, compute product-by-product margins. You might stock more products with high margins and high demand — and less of everything else. Whenever possible, return excess supplies of slow-moving materials or products to your suppliers.
To help prevent lost sales due to lean inventory, make sure your product mix is sufficiently broad and in tune with consumer needs. Before cutting back on inventory, negotiate speedier delivery from suppliers or consider giving suppliers access to your perpetual inventory system.
Reality check
Right now, many businesses are sitting on strategic stockpiles they purchased to combat marketplace uncertainty. If this is true of your business and you haven’t been able to move goods fast enough, you may want to consider new inventory management methods. We can advise you on such challenges as using software to accurately forecast inventory needs, pricing goods to increase profitability without alienating customers, and modeling the cost impacts of tariffs and other economic variables.
© 2026
Limitation basics
The deduction for business interest expense for a particular tax year is generally limited to 30% of the taxpayer’s adjusted taxable income (ATI). That taxpayer could be you or your business entity, such as a partnership, limited liability company (LLC), or C or S corporation. Any business interest expense that’s disallowed by this limitation is carried forward to future tax years.
Business interest expense means interest on debt that’s allocable to a business. For partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations, the limitation on the business interest expense deduction is applied first at the entity level and then at the owner level under complex rules.
The limitation on the business interest expense deduction is applied before applying the passive activity loss (PAL) limitation rules, the at-risk limitation rules and the excess business loss disallowance rules. For pass-through entities, those rules are applied at the owner level. But the limitation on the business interest expense deduction is generally applied after other federal income tax provisions that disallow, defer or capitalize interest expense.
The changes
The OBBBA liberalizes the definition of ATI and expands what constitutes floor plan financing. For taxable years beginning in 2025 and beyond, the OBBBA calls for ATI to be computed before any deductions for depreciation, amortization or depletion. This change more closely aligns the definition of ATI to the financial accounting concept of earnings before interest, taxes, depreciation and amortization (EBITDA) and increases ATI, thus increasing allowable deductions for business interest expense.
For taxable years beginning in 2025 and beyond, the OBBBA also expands the definition of floor plan financing to cover financing for trailers and campers that are designed to provide temporary living quarters for recreational, camping or seasonal use and that are designed to be towed by or affixed to a motor vehicle. For affected businesses, this change also increases allowable deductions for business interest expense.
Exceptions to the rules
There are several exceptions to the rules limiting the business interest expense deduction. First, there’s an exemption for businesses with average annual gross receipts for the three-tax-year period ending with the prior tax year that don’t exceed the inflation-adjusted threshold. For tax years beginning in 2025, the threshold is $31 million. For tax years beginning in 2026, the threshold is $32 million.
The following businesses are also exempt:
- An electing real property business that agrees to depreciate certain real property assets over longer periods.
- An electing farming business that agrees to depreciate certain farming property assets over longer periods.
- Any business that furnishes the sale of electrical energy, water, sewage disposal services, gas or steam through a local distribution system, or transportation of gas or steam by pipeline, if the rates are established by a specified governing body.
If you operate a real property or farming business and are considering electing out of the business interest expense deduction limitation, you must evaluate the trade-off between currently deducting more business interest expense and slower depreciation deductions.
It’s complicated
The rules limiting the business interest expense deduction are complicated. If your business may be affected, contact us. We can help assess the impact.
© 2025
