Lobbyists are pushing Congress to prevent a 2022 tax change set to expand the number of companies losing out on a debt financing incentive from taking effect.
The 2017 tax act (Pub. L. No. 115-97) placed a new cap on the amount of debt interest payments companies can deduct from their taxable income. The cap hovers at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) until 2022, when that maximum shrinks to 30 percent of just earnings before interest and taxes (EBIT).
For leveraged corporations spending a lot on capital and intellectual property—which are depreciated and amortized, respectively—that change will make their debt more expensive and their tax bills larger. To put that in quantitative terms, the revenue the provision is expected to bring in over the four years after that switch is nearly double the amount it raises in the four years prior to the adjustment, according to the Joint Committee on Taxation.
Some companies appear to be holding out for a legislative change. A June survey from Moody’s Investors Service found that 27 percent of corporate respondents expected the law’s income measure switch from EBITDA to EBIT to be “further delayed or terminated.”
K Street is working on it.
Stopping the Switch
There’s an effort to keep the income measure, from which the 30 percent limit is taken, from transitioning to the smaller amount—earnings before interest and taxes—which removes depreciation and amortization from the equation.
Advocates for companies with significant leverage are working to “ensure EBITDA doesn’t morph into EBIT,” said Jason Mulvihill, general counsel at the American Investment Council in Washington. The group represents private equity firms, which can hold stakes in leveraged companies from a range of sectors, and consequently stand to be impacted by the policy as well.
“I think there’s a lot of sympathy on both sides of the aisle for pursuing an EBITDA limit going forward,” he said, adding that “it’s too early to tell” what sort of legislative vehicle would halt the change before it happens, but “it would have to be a revenue measure of some kind.”
Although that change in the limit isn’t set to happen until 2022, Mulvihill said, the issue is something lawmakers are “going to review and discuss over time,” but “businesses that care about this issue” need to plan well in advance.
Another tax lobbyist, who spoke on the condition of anonymity to protect client sensitivities, said regulations governing the new interest deduction limit were a more immediate priority, but that a legislative change to halt the EBITDA to EBIT adjustment remained a “medium-term” objective.
There’s little expectation that such legislation would pass this year, the person said, but lobbyists and their clients generally consider stopping that switch from becoming effective even more important than an increase in the percentage limit.
Here to Stay
More than 150 lobbying firms, companies, and organizations lobbied Congress on interest deductibility—which falls under amended tax code Section 163(j)—during the last three months of 2017, as lawmakers were ironing out what would become the 2017 tax law, according to a Bloomberg Government analysis of lobbying disclosure data.
In the first quarter of this year, 88 continued to do so. In the second three months of the year, 60 of those 88 returned to lobby, three returned from the fourth quarter of 2017, and four began to lobby on the issue for the first time, the analysis shows.
Washington Tax & Public Policy Group LLC garnered the most clients when it came to this issue, with 13 in the fourth quarter, 15 in the first quarter, and 14 in the second, including—in all three quarters—Johnson & Johnson, Pfizer Inc., Caterpillar Inc., and Procter & Gamble Co.
Practitioners and lobbyists who spoke to Bloomberg Tax said they don’t expect the limit to go away anytime soon, as the U.S. only just caught up with other Western countries in disincentivizing debt financing.
“We can all kind of guess as to what might happen in the future, what parts of tax reform will survive and what parts won’t,” said David Golden, a principal in Ernst & Young LLP’s Washington office. “But I would expect that given this is a global phenomenon, we would have some kind of limitations on the deductibility of interest expense for the pretty indefinite future.”