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August 3, 2020

IRS Loosens Cap On Tax Deductions For Debt Interest Payments

As Bloomberg Tax reports, on July 28, the U.S. Internal Revenue Service loosened a 2017 restriction that had capped tax deductions for debt interest payments at 30 percent of earnings before interest, taxes, depreciation, and amortization, or EBITDA. The announcement reflects a temporary increase in the cap to 50 percent through the end of 2020, as was enacted by Congress in a COVID-19 stimulus bill passed this past March.

As the National Association of Manufacturers has explained:

  • Before 2017, businesses could pretty much subtract their full interest payments on debt, but the 2017 tax reform law limited the business interest deduction to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA) for tax years starting in 2018.
  • Starting in 2022, the deduction was to be limited even more, to earnings before interest and tax (EBIT). Excluding depreciation and amortization would make it more expensive for businesses like manufacturers to finance capital equipment purchases.
  • The Treasury Department had proposed a rule that would have effectively imposed the EBIT standard now instead of two years from now.

The manufacturing industry pushed back against that proposal, resulting in the July 28 release of the rules without that provision. The NAM said the IRS’s decision last week will make it “easier for manufacturers to invest in their business, their employees and their communities.”