Manufacturing, energy, and health care industry representatives used an IRS hearing to continue their push to soften the 2017 tax overhaul’s limit on businesses’ write-offs of debt interest payments.
The law placed a cap on the amount of debt interest payments companies can use to shrink their tax bills under amended tax code Section 163(j), effectively making debt more expensive for highly leveraged companies and aligning the U.S. with much of the developed world. The new limit is roughly equal to 30 percent of earnings before interest, taxes, depreciation, and amortization are taken out of the income equation, and narrows to 30 percent of earnings before interest and taxes are subtracted from income beginning in 2022.
Among those pushing the government to change the proposed rules (REG-106089-18) is the 163(j) Working Group, which doesn’t disclose its members but says membership includes manufacturers, producers, and resalers from a variety of industries.
Its representative at a Feb. 27 Internal Revenue Service hearing, Annette Smith, a partner at PwC and former deputy to the Treasury Department’s Tax Legislative Counsel, urged IRS and Treasury officials to revise several lines in the rules that don’t allow depreciation expenses allocated to companies’ inventories and included in their cost of goods sold to be added back into the income measure.
For manufacturers, oil refiners, and, to a lesser extent, retailers, the language in the proposed rules keeping them from adding those amounts back into their measure of income, from which the 30 percent limit is derived, means the narrowing of the restriction that is supposed to arrive in 2022 might as well already be here. That makes debt pricier for some leveraged companies a lot sooner than they expected.
“It’ll have a particularly adverse impact on Working Group members who are capital-intensive manufacturers and producers,” Smith said, reading from prepared remarks. “While a particular focus of the act was to increase manufacturing jobs, the working group members will instead be disadvantaged in raising capital and making the investment needed in their businesses.”
The IRS released the proposed rules in November.
Working Groups at Work
Smith’s colleague, Pamela Olson, a deputy tax leader in PwC’s Washington National Tax Services Practice and former assistant Treasury secretary for tax policy, submitted a public letter to the IRS on the issue. Like Smith, Olson cited in her letter former House Speaker Paul Ryan’s (R-Wis.) comments on the not-yet-passed “thin cap rule” and language in the 2017 tax law’s conference report as evidence that the agency’s proposed method of calculating income for the deduction limit didn’t match lawmakers’ intent.
A representative of the American Institute of CPAs also called for a change to this part of the regulations at the hearing. Dozens of firms, companies, and lobbying groups—including Murray Energy Corp., Occidental Petroleum Corp., and NextEra Energy Inc.—requested a change in comment letters. At least 33 public comments out of just over 100 on the proposed rules mention or focus on the issue.
The National Association of Manufacturers has been vocal on the issue as well, writing its own letter and seeking input from members of its “interest expense working group.”
When asked about the 163(j) Working Group’s membership, Smith declined to name any members. Smith hasn’t appeared on a federal Lobbying Disclosure Act form since 2015, though Olson has lobbied the Treasury Department on “tax reform” for the Business Roundtable, a lobbying group representing corporate executives, according to a fourth quarter 2018 disclosure form.
Real Estate Exception
Another vocal industry calling for a revision to the proposed rules is the skilled nursing and assisted living sector. The entities have flooded the IRS with similarly worded comments in recent weeks, asking it to soften a proposed anti-abuse rule.
The 2017 law allows a “real property trade or business” to opt out of the interest write-off limit, at the cost of losing the tax overhaul’s coveted full-expensing provision, though plenty of tax planners are urging their real estate clients to simply make that election.
But to prevent companies from simply setting up a real estate business as a means of exploiting this election, the IRS proposed an anti-abuse rule under Treasury Regulations Section 1.163(j)-9. Under this rule, a real estate entity that leases 80 percent or more of its property to a business with the same owner won’t qualify for the election.
This prompted a flood of comments from owners and representatives of skilled nursing facilities and assisted living centers asking for the rule to be revised or scrapped.
Wes Sheumaker, a partner at Eversheds Sutherland LLP in Atlanta, reiterated at the hearing the points he made in a comment letter on behalf of Life Care Centers of America, a senior living facility operator.
The anti-abuse rule isn’t necessary, Sheumaker said, adding that it should at least be modified to include a standard requiring the business to show its structure serves some purpose other than tax avoidance.
Nathan Richwine, tax services manager at CliftonLarsonAllen LLP in Noblesville, Ind., repeated his firm’s call for a change to the anti-abuse rule, as outlined in its comment letter, at the hearing as well. Others who have submitted comments on the issue include Nexion Health Inc., American HealthCare LLC, and the American Health Care Association, a major industry group. At least 22 comments on the proposed rules addressed the issue.