What is it?
Interest deductibility refers to the allowance under the U.S. tax code for a business to deduct interest expense from its taxable income, currently up to 30 percent of the businesses Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
Interest expense, simply put, is the cost of borrowing money. It is an operating expense that is incurred in the ordinary course of a trade or business and is paid by any company that funds a portion of its operations with debt. Virtually every company in America uses debt to finance fundamental business activities, like meeting payroll, buying raw materials or making critical capital investments. Businesses issue debt for important economic reasons. Most companies fund their operations with a mix of debt and equity. Debt is especially important for attracting capital to firms with new technologies or uncertain prospects. Although private equity firms and funds generally use little leverage, some private equity portfolio companies do utilize debt to fund their operations, like most other operational businesses in the economy.
The AIC’s Position
The AIC believes that the new 30 percent of EBITDA limit imposed on interest deductibility is not helpful for long-term investing and should not be made more restrictive in the future. In the short-term, the new interest deductibility limit established by the Tax Cuts and Jobs Act should conform to commercial realities. In the long-term, imposing an even more restrictive 30 percent of Earnings Before Interest and Taxes (EBIT) limit on interest deductibility would put the U.S. economy and U.S. businesses at a competitive disadvantage with the rest of the world.
Full expensing is also not an acceptable substitute for interest deductibility because it is a short-term fix with a limited, one-time benefit to the economy. Interest deductibility is a key component of companies’ decision-making that, in turn, drives long-term growth.
The AIC looks forward to working with policymakers in the years ahead to ensure that the new limit imposed on interest deductibility is improved.