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March 18, 2019

A New Treasury Rule Could Make Financing Equipment Purchases More Expensive

According to the National Association of Manufacturers (NAM), it’s possible that it will soon get much more expensive for manufacturers to finance equipment purchases. That’s because recently proposed U.S. Treasury Department regulations, if finalized without modification, would limit the ability of businesses to deduct interest on their debts.

Here’s what’s going on: for tax years beginning in 2018 through 2021, the Tax Cuts and Jobs Act (TJCA), which was passed in 2018, limited interest deductions to 30 percent of a company’s earnings before interest, tax, depreciation, and amortization (EBITDA). Beginning in 2022, according to the TJCA, an EBIT standard would take effect that would further limit available interest deductions for capital-intensive industries by excluding depreciation and amortization from the base upon which allowable deductions are calculated. Treasury’s proposed regulations, however, would effectively impose the stricter EBIT today – a full four years earlier than expected. According to NAM, this rule “would disproportionately harm manufacturing by making it more expensive to finance capital equipment purchases.”

It also would act “as a disincentive to utilizing full expensing (also known as bonus depreciation), a key pro-growth incentive in tax reform which reduces after-tax costs by providing a 100 percent deduction for the purchase of equipment and machinery.”

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