Eliminating Interest Deductions and Tax Reform Updates

Since the Inauguration of Donald Trump as President, Tax Reform has ground to a halt, as Health Care Reform and other more controversial matters have captured Capitol Hill’s attention.  One little noticed proposal some Congressmen are favoring is the elimination of the business interest deduction on loans and other debt. 

Currently, companies and individuals can use debt financing as a generally cheaper alternative to equity financing due to the ability to deduct the interest on their tax return.  The government is essentially putting a discount on investing and incentivizing corporations to use debt, similar to how a grocery store incentivizes buyers by discounting a can of peas. When these corporations take on debt and borrow more, ideally, they use the extra money to invest in growing their company. Once enough companies start using the debt to grow and improve, the overall economy starts to grow and improve — so the theory goes. 

But as you are aware, mismanagement of debt can have disastrous results at both the micro and macro levels!  At the macro level, as we saw with the economic crisis, the same debt that caused an economic boom can end up creating an economic collapse. 

Overall, heavily leveraged firms, and more specifically, portfolio companies owned by private equity firms seem to be under the most pressure to fight this elimination. Private equity firms will have to revise their business model if this actually passes. 

But private equity firms are not the only businesses affected. Any business that makes interest payments on loans and bonds are in danger of having their bottom lines negatively impacted. Private companies are especially notorious for taking on more debt without the watchful eye of public shareholders. Thus, more debt taken-on equates to a higher impact if the deduction is eliminated. Today, with U.S. businesses paying roughly $1.3 trillion in gross interest annually, the complete removal of the business interest deduction is a huge issue flying under the radar. Depending on your perspective, this elimination could help balance the budget and prevent future debt bubbles or it could end up decreasing investment and hindering the economy. 

In terms of overall tax reform, at this writing political insiders say that corporate tax reform and individual tax cuts are being worked on behind the scenes, and that the tax bill is expected to take shape during the fall of this year and be signed into law by early next year. 

We will continue to follow both the interest deduction proposal and tax reform in general.  Stay tuned! 

 

BGBC Partners, LLP is a full service certified public accounting and business consulting practice.