Client Alerts
Dec. 21, 2017

The Limitations on Interest Deductibility in the New Tax Law

On Dec. 20, 2017, the House of Representatives by a vote of 224 to 201 passed the most significant tax legislation in more than three decades. The Senate passed the same legislation earlier in the day.

Although the impact of all the changes contained in the legislation is not known, the most significant change affecting leveraged finance markets — interest deductibility — is now known.

As more fully described in the Conference Report for the legislation (H.R. 1 Tax Cuts and Jobs Act), the deduction of net interest expense (i.e., interest expense in excess of interest income) for corporate borrowers1 would be capped at 30 percent of “adjusted taxable income.”2

  • For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2022, adjusted taxable income is computed without regard to depreciation and amortization (and thus is akin to EBITDA).3
     
  • For taxable years beginning after Jan. 1, 2022, adjusted taxable income reflects depreciation and amortization (and thus is more akin to EBIT).
     
  • The amount of any interest expense not allowed as a deduction in any taxable year may be carried forward indefinitely.

 

1 Special rules apply to entities taxed as partnerships. Additionally, these limitations do not apply to (i) interest paid in a real property trade or business, (ii) certain regulated public utilities and (iii) taxpayers meeting the less than $25 million gross receipts test of Section 448(c) of the tax code.

2 Excludes interest on floor plan financings, which is subject to different rules on deductibility.

3 Adjustable taxable income is also computed without regard to: items not properly allocable to a trade or business; business interest income or expense; and NOLs. The Secretary of the Treasury may provide other adjustments to the computation of adjustable taxable income.

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