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The New Tax Law: Interest Payments on Business Debt -- WSJ

14 Feb 2018 7:32 am

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 14, 2018).

Heavily indebted companies will face new limits on their ability to deduct interest payments from their tax returns, a change that makes business debt less attractive.

Interest payments have long been deductible, but the tax overhaul creates a cap on that break that will raise $253 billion in tax revenue over the next decade, according to Congress's Joint Committee on Taxation. Under the new rule, companies will be able to deduct their net interest costs, but only up to 30% of earnings before interest, taxes, depreciation and amortization.

The law doesn't make any exceptions for previously issued debt, so companies that borrowed in the past will be facing the stringent new limits immediately.

Starting in 2022, unless Congress acts again, the restriction will get even tougher. At that point, the 30% limit will apply to a different measure of income: earnings before interest and taxes. The change would hit even more companies.

-- No impact on small firms, car dealers: Small firms won't be affected. The limit applies only to businesses with average gross receipts of at least $25 million for the preceding three years. Car dealers and other similar companies also will be exempt from the limit on the loans they use to get inventory on their showroom floors.

The legislation exempts electric utilities from the limit and lets farmers and many real-estate firms opt out of the limit. Real-estate companies don't get the benefit of immediate write-offs for capital investments that tax policy experts view as the trade-off for the interest limits.

Richard Rubin

Write to richard.rubin@wsj.com

(END) Dow Jones Newswires

February 14, 2018 02:32 ET (07:32 GMT)

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