As more of the dust settles after the December 2017 passage of the Tax Cuts and Jobs Act, P.L. 115-97, borrowers and lenders alike are reconsidering their future financing strategies. One of the more significant changes in the tax law is the new limit imposed on interest expense deductions.
Prior to the passage of the tax reform bill, corporations could usually deduct the full amount of their business debt interest payments. The tax reform bill changed this for many taxpayers, including corporations, by imposing a limitation of the amount of the deduction based upon a formula. The new formula generally caps the business interest deduction at the sum of “(A) the business interest income of such taxpayer for such taxable year, (B) 30 percent of the adjusted taxable income of such taxpayer for such taxable year, plus (C) the floor plan financing interest of such taxpayer for such taxable year.” For most corporations, the practical result of the new tax provisions is that they can no longer deduct net interest expenses exceeding 30 percent of their earnings before interest, taxes, depreciation and amortization (EBITDA). This new challenge for heavily leveraged businesses will only increase in 2022, when the deduction must be calculated after computing depreciation and amortization expenses.