The question raises an important point, one that can provide a favorable tax result for the members of RDG, LLC, and highlights why it is beneficial to measure a partnership’s gross receipts carefully to determine whether a partnership qualifies for the small business exemption under §163(j)(3). The small business exemption is met if the taxpayer’s average annual gross receipts for the three tax years immediately preceding the current tax year do not exceed the threshold amount. The threshold amount is currently $31,000,000 for 2025 and $32,000,000 for 2026.
The previously allocated EBIE is treated as paid or accrued by the LLC members in 2025 and is subject to each member’s own §163(j) limitation (if any). If the member is not subject to §163(j) (e.g., the member also qualifies for the small business exemption), the member may deduct all the EBIE in 2025. (See Reg. §1.163(j)-2(h)(7) and Reg. §1.163(j)-6(m)(3).)