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IRS Proposes Rules on Interest Deductibility

The IRS is proposing new rules to the 2017 Tax Cuts and Jobs Act, which would limit the amount business can deduct from interest expenses.

IRS Proposes Rules on Interest Deductibility

In a continuation of its efforts to implement the sweeping 2017 Tax Cuts and Jobs Act, the IRS issued proposed guidance on the limits to business interest expense deductions.

Prior to tax reform, the ability to deduct interest paid on corporate debt was allowed in full. However, the tax bill limited interest deductibility on the basis of 30 percent of earnings before interest, tax, depreciation, and amortization. After 2022, the deduction is limited on the basis of 30 percent of earnings before interest and taxes. The real estate industry, farms, and utilities are generally exempted from these limits.

Among other proposed changes, the IRS’s guidance transforms some business expenses to interest expenses, further limiting deductions. For instance, loan commitment fees were previously business expenses but would change to interest expenses.

ACG helped found the Businesses United for Interest and Loan Coalition, which fought for the ability to continue to deduct interest paid on debt. Congressional tax writers attempted to fully eliminate the deduction in the first drafts of tax reform. This issue is particularly relevant for middle-market private equity firms, who often rely on leverage as a financing tool for purchasing companies.

ACG is actively analyzing the proposed rulemaking and will stay apprised of any developments.