Middle-Market Public Policy Roundup

In this week’s roundup, we look at a revision to the 2017 Tax Cuts and Jobs Act proposed by the IRS that could make it more difficult for businesses to finance their debt. Plus, the Federal Reserve published a report detailing vulnerabilities to the financial system. Closing out, we look ahead to the annual Government-Business Forum on Small Business Capital Formation hosted by the SEC and organized in partnership with the National Center for the Middle Market.

IRS Issues Proposed Rules on Interest Deductibility

Continuing its efforts to implement tax reform, the Internal Revenue Service recently issued proposed guidance on a provision that could significantly increase the burden on corporate borrowers.

This week, the IRS published a notice regarding a provision of the 2017 Tax Cuts and Jobs Act that includes limiting deductions businesses can make on interest expenses.

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

Among other proposed changes is the IRS’s recommendation to transform some business expenses to interest expenses, further limiting deductions. For instance, loan commitment fees that were previously business expenses would be changed to interest expenses.

Congressional tax writers attempted to fully eliminate the deduction in early drafts of tax reform. This issue is particularly relevant for middle-market private equity firms, which often rely on leverage as a financing tool for purchasing companies.

In an effort to support middle-market companies, ACG helped found the Businesses United for Interest and Loan (BUILD) Coalition, which fought for the ability to continue to deduct interest paid on debt. ACG is actively analyzing the proposed rulemaking and will keep members apprised of any developments.

Fed Issues First Financial Stability Report, Warns of Corporate Debt Levels

The Federal Reserve issued its first financial stability report on Wednesday. Among issues such as trade disputes and elevated valuations, the report focused on corporate debt as a potential area of risk for the economy.

The report concluded debt levels are high among businesses, and there are signs of deteriorating credit standards. In addition, debt has grown fastest at firms with weaker earnings and higher leverage. The report also said leveraged hedge funds pose risk because they have increased their leverage by as much as a third over the past two years.

Speaking on the subject at the Economic Club of New York, Federal Reserve Chairman Jerome Powell said he believed the core of the financial system would weather any downturn, though investors in securitized loans and debt-laden businesses might not be as lucky.

REMINDER: SEC to Hold Government-Business Forum on Small Business Capital Formation on Dec. 12

The Securities and Exchange Commission will host the annual Government-Business Forum on Small Business Capital Formation on Dec. 12.

To develop recommendations to improve small business capital formation, the SEC is partnering with the National Center for the Middle Market to organize the event, which will be held at The Ohio State University.

The forum will feature a panel discussion exploring how capital formation options are working for small businesses followed by breakout groups to formulate specific policy recommendations.

IMPORTANT NOTE:  Participants may attend a breakout group in person or by teleconference, but must register online by Dec. 7.

Interested in public policy issues that affect the middle market? Email Maria Wolvin, senior counsel and vice president of public policy, at mwolvin@acg.org to sign up for ACG’s Public Policy Interest Group and be the first to hear about relevant congressional, regulatory and policy-related developments.