Lawmakers are getting closer to the finish line with budget reconciliation. Extension of the expiring provisions of the Tax Cuts and Jobs Act (TCJA) remains paramount. With a unique opportunity to continue to simplify the tax code and embrace pro-growth reforms, the expansion of interest deductibility for businesses is a key step in this process.
The TCJA was critical in lowering the marginal rates for individual taxpayers and the tax rate for corporations. However, the law put in place a limitation on interest deductibility equal to 30 percent of a taxpayer’s adjusted taxable income (ATI). That limitation became even more restrictive in 2022. Restoring the full impact of the pro-investment and pro-growth tool of interest deductibility should be a priority for Congressional lawmakers looking to build on the past successes of TCJA and ensure a strong American economy for years to come.
Under the TCJA, businesses were allowed to deduct their interest on business loans but those deductions were capped at 30 percent of their adjusted taxable income (ATI), defined as earnings before interest, tax, depreciation and amortization (EBITDA). However, starting in 2022, the EBITDA standard was replaced with a more restrictive earnings before interest and tax (EBIT) standard, which further restricted a company’s ability to deduct business interest
The more restrictive EBIT standard for business interest deductibility has placed unwanted and increased pressure on businesses that rely on debt financing to support company investments and job growth. A more restrictive EBIT standard in particular negatively impacts capital-intensive businesses, like manufacturing, infrastructure, real estate, energy and transportation, where depreciation and amortization are significant costs.
As Congress and the administration look to grow American businesses, American factories and American jobs, encouraging investment restoring a pro-growth interest deductibility standard that encourages -- not discourages -- investment will be vital. Unfortunately, the current EBIT restrictions on interest deductibility distort future investment decision-making by corporations, impacting future job and wage growth. According to the National Association of Manufacturing, the current exclusion of depreciation and amortization from interest deductibility makes debt financing more expensive, especially in an era of higher interest rates. As a result, a restrictive standard ends up punishing and discouraging job-creating investments in infrastructure, factories, equipment and even intellectual property. In order to aid manufacturers and other industries that require new investments, Congress and the administration should support restoring interest deductibility to the pro-growth 30 percent of EBITDA standard.
Moreover, according to the Tax Foundation, the restrictions on interest deductibility today in the tax code makes the United States an outlier compared to other countries. Restoring the 30 percent of EBITDA standard back to interest deductibility would increase Americans’ competitiveness globally. The risks of rising interest rates and economic uncertainty can be mitigated by including depreciation and amortization in interest deductibility. Companies will inevitably have to deal with changing economic landscapes and increased costs. Lawmakers can make it easier.
Along with the transition to EBIT, the TCJA contained multiple provisions that changed some aspects of cost recovery for businesses. The law included 100 percent bonus depreciation. However, since 2023, the expensing deduction has reduced by 20 percent each year, and in 2026 it will be fully phased out. Research and development (R&D) amortization was also included in the bill. Before 2022, companies could immediately deduct R&D costs. Now, companies have to amortize those expenses over a 5-year period. Bringing together the expansion of full expensing, R&D credits, and a transition back to EBITDA for interest deductibility are all proven ways that legislators can simplify the tax code for businesses, allowing for increased investment and economic growth.
Significantly, the removal of depreciation and amortization from the business interest deductibility standard impacts the tax code’s neutrality as well. According to the Mercatus Center, “Neutrality refers to the notion that taxes should not affect the decision-making processes of businesses or individuals.” By creating uncertainty about how the tax code will reflect interest deductibility, lawmakers impact how a business might invest in the future. Reintroducing EBITDA to the code would prevent that uncertainty and provide clarity for the future of interest deductibility.
Although the TCJA was successful in lowering the corporate tax rate from 35 percent to 21 percent, the limits on expensing and interest deductibility puts opposite pressure on businesses when it comes to investing. The tax code should be built to encourage business growth in all aspects. Allowing bonus depreciation and R&D credits to expire, combined with the transition from EBITDA to EBIT only complicates the tax code and creates the wrong incentives. With a large amount of TCJA provisions set to expire at the end of 2025, lawmakers should act now to prevent increased confusion for businesses and individual taxpayers.
The reinstatement of the EBITDA standard is paramount for businesses to avoid double taxation and increased costs. Congress should move swiftly to include it in their tax policy negotiations. The restoration of the 30 percent of EBITDA standard for interest deductibility will expand business growth and create new job opportunities. Combined with the expansion of full expensing and research and development credits, lawmakers can continue to develop pro-growth tax reform and create opportunities for economic growth across industries for years to come.
David Williams is the president of Taxpayers Protection Alliance
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