Tax-Writers Look at ‘Blend’ of Interest Deductions, Expensing

For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Laura Davison

Tax-writers are looking at ways to “blend” full expensing and interest deductibility provisions in an overhaul of the tax code, Rep. Vern Buchanan (R-Fla.) said.

The House Ways and Means Committee is addressing ways that businesses could choose to take one tax break instead of the other or get a percentage of each, Buchanan told reporters Feb. 8 after a Bipartisan Policy Center event. Lawmakers are looking at situations where that flexibility might be available, he said.

The House Republican tax plan blueprint includes immediate tax write-offs for all capital expenditures, including real estate. It also eliminates the ability to deduct interest.

“That’s going to be a big issue and something that people are concerned about,” Buchanan said.

Such a move could be a win in the real estate world, where loans are frequently refinanced every five years. The transition rules for tax overhaul are expected to grandfather interest deductions on old loans, but property owners would lose the ability to write off the interest once the loan is re-written, even though they still are holding the property for many more years.

However, more details on how and when remaining basis in an asset is recovered is needed to fully determine which businesses could benefit from a partial expensing and limited interest deductions, said Michael Greenwald, a partner at Friedman LLP who heads the firm’s corporate and business tax practice.

Passthrough Priorities

Ways and Means Committee Chairman Kevin Brady (R-Texas), who is spearheading the tax overhaul effort, says the plan will remove corporate incentives to rely on debt in the tax code.

Talk of a potential blend of expensing and interest deduction tax breaks comes as there is growing concern among partnerships, S Corporations and limited liability companies that the needs of those entities, such as the tax consequences of borrowing, aren’t being considered in the tax overhaul discussions.

For passthrough entities, debt and equity are already relatively neutral, Steven Schneider, a partner at Baker & McKenzie LLP, told Bloomberg BNA. Not allowing interest deductions would shift the paradigm so that equity would be more desirable than debt, he said.

Some within Ways and Means have pushed offering small businesses, such as those with profits of less than $1 million, a trade-off between interest deductibility and expensing as a way to help companies that rely on leverage to buy real estate.

Million Dollar Mark

A threshold of this level would mean that the interest deduction flexibility wouldn’t be available to many, because $1 million isn’t a very significant number in real estate, Schneider said.

Many small businesses already have full expensing for up to $500,000 in expenditures under tax code Section 179, so the House GOP blueprint takes away interest deductibility without adding much of anything that they don’t already have, a Republican aide told Bloomberg BNA.

“While it would be a good thing, I don’t think it is going to gain any traction,” the aide said. “It cuts into the case that this is a true consumption tax if they allow interest deductibility for some but not others. It makes the weak case before the World Trade Organization even weaker.”

To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Daily Tax Report