***This blog has been updated on December 21, 2017 to reflect the tax bill passed by Congress***
In the past month, the House and Senate have both voted along party lines to approve their own versions of comprehensive tax reform legislation. In order to gather the necessary votes to pass their respective chambers, Republican leaders made some significant modifications during the process. In a series of blog posts, we will cover the major pieces of both bills and compare them to current law. You can see all tax reform 2017 related blogs here.
This blog will cover the topic of business interest expense deduction limitation. This provision would negatively impact highly leveraged businesses and could result in a permanent disallowance of interest expense. Businesses with net interest expense should evaluate changes to their capital structure to prevent permanent loss of interest deductions.
CONFERENCE COMMITTEE APPROVED BILL
The deduction for net interest expense for most businesses would be limited to 30% of adjusted taxable income after 2017. Adjusted taxable income is defined as earnings before interest and taxes (EBIT). The limitation would generally be applied at the taxpayer level except for partnerships and S Corporations, where it applies at the entity level with special rules at the owner level to prevent double counting of income. Taxpayers are exempt from the limitation if they have average annual gross receipts for the three-taxable year period ending with the prior taxable year that do not exceed $25 million
CURRENT LAW
Interest expense is a fully deductible business expense for all businesses.
HOUSE TAX REFORM BILL
The deduction for net interest expense for all businesses would be limited to 30% of adjusted
taxable income after 2017. Adjusted taxable income is defined as earnings before interest, taxes, depreciation, and amortization (EBITDA). The limitation would be applied at the filer level. Small businesses and certain industries are exempt from these limitations.
Disallowed interest deductions would be allowed a 5-year carryover. The carryover would be attributable to the business, but may be allowed for pass-through owners in some cases.
SENATE TAX REFORM BILL
The deduction for net interest expense for most businesses would be limited to 30% of adjusted taxable income after 2017. Adjusted taxable income is defined as earnings before interest and taxes (EBIT). The limitation would generally be applied at the taxpayer level except for partnerships and S Corporations, where it applies at the entity level with special rules at the owner level to prevent double counting of income. Exceptions would be provided for small businesses and certain regulated public utilities.