Witnesses At Senate Finance Committee Hearing Emphasize The Harmful Effects Of Limiting Or Eliminating The Interest Deduction

At today’s Senate Finance Committee Hearing titled “Business Tax Reform,” witnesses highlighted the importance of maintaining full interest deductibility for all American businesses. In the hearing, Real Estate Roundtable President & CEO Jeffrey DeBoer and American Institute of Certified Public Accountants Past Chair Troy Lewis provided insights about how the interest deduction works practically to create jobs, produce economic growth, and finance daily business operations.

During the hearing, some witnesses testified that curbing interest deductibility would harm American businesses because of fundamental differences in debt and equity financing. Specifically, Lewis stated that some firms, especially small businesses, do not have easy access to equity markets and restricting the interest deduction facilitates tax policy that “discourages the formation of new businesses.”

Additionally, DeBoer emphasized that limiting businesses’ ability deduct interest expense would have unforeseen implications for the U.S. economy. America’s capital markets are “the envy of the world,” Deboer said. Limiting the interest deduction would have “unintended consequences” that include impeding entrepreneurs’ “flexibility to build, operate, and grow their businesses.”

Below are excerpts from the testimonies. The full hearing can be found here.

Real Estate Roundtable CEO Jeffrey DeBoer States That Eliminating Or Limiting Interest Deductibility Would Raise The Cost Of Capital For Businesses. “Repealing or imposing limits on the deductibility of business interest would fundamentally change the underlying economics of business activity, including commercial real estate transactions. This could lead to fewer loans being refinanced, fewer new projects being developed, and fewer jobs being created. Legislation altering the tax treatment of existing debt could harm previously successful firms, pushing some close to the brink of insolvency or even into bankruptcy. By increasing the cost of capital, tax limitations on business debt could dramatically reduce real estate investment, reducing property values across the country, and discouraging entrepreneurship and responsible risk-taking.” (Jeffrey DeBoer, “Written Statement For Senate Finance Hearing On Business Tax Reform,” Senate Finance Committee, 9/19/17)

Debt Is “Very Important For All Businesses” Because It Allows For “More Control Over Business Operations,” According To Real Estate Roundtable CEO Jeffrey DeBoer. ” The use of debt is very, very important for all businesses, not just startup businesses and not just small businesses, but all businesses that need this kind of flexibility to use debt. Debt by the way, allows entrepreneurs to retain more control over their businesses operation, if they have equity they give up control of some of their business. They retain more control of their business operation by using debt. It’s something that historically has been recognized as a cost of doing business, like other costs of doing business, and we really see no reason to adjust it through the tax code.” (Jeffrey DeBoer, “Statement For Senate Finance Hearing On Business Tax Reform,” Senate Finance Committee, 9/19/17)

Real Estate Roundtable CEO Jeffrey DeBoer States That Eliminating Or Limiting Interest Deductibility Would Raise The Cost Of Capital For Businesses. “Repealing or imposing limits on the deductibility of business interest would fundamentally change the underlying economics of business activity, including commercial real estate transactions. This could lead to fewer loans being refinanced, fewer new projects being developed, and fewer jobs being created. Legislation altering the tax treatment of existing debt could harm previously successful firms, pushing some close to the brink of insolvency or even into bankruptcy. By increasing the cost of capital, tax limitations on business debt could dramatically reduce real estate investment, reducing property values across the country, and discouraging entrepreneurship and responsible risk-taking.” (Jeffrey DeBoer, “Written Statement For Senate Finance Hearing On Business Tax Reform,” Senate Finance Committee, 9/19/17)

The Business Interest Deduction Is Essential For Businesses Of All Sizes, Especially In A Rising Interest Rate Environment, Says Real Estate Roundtable CEO Jeffrey DeBoer. “Borrowing is not limited to large companies—four out of five small businesses rely on debt financing. Businesses rely on credit for working capital and to weather shifts in demand. Limiting the deductibility of interest would increase the cost of capital, discouraging business formation and making it harder to grow into larger businesses. Over time, rising interest rates will magnify the harm, potentially leading to greater financial volatility and higher default rates.” (Jeffrey DeBoer, “Written Statement For Senate Finance Hearing On Business Tax Reform,” Senate Finance Committee, 9/19/17)

Real Estate Roundtable CEO Jeffrey DeBoer Explains How Changing The Tax Treatment Of Interest Would Hurt Business Investment. “The burden of changing the deductibility of interest may fall disproportionately on entrepreneurs and small developers—those most likely to own properties in small and medium-sized markets—because they use greater leverage to finance their activities and lack the deep portfolio of assets to absorb the losses generated from expensing. Restrictions may also impede efforts to attract private capital for infrastructure investment.” (Jeffrey DeBoer, “Written Statement For Senate Finance Hearing On Business Tax Reform,” Senate Finance Committee, 9/19/17)

Access To Debt Markets Is Essential For Entrepreneurs To “Build, Operate, And Growth Their Businesses” According To Real Estate Roundtable’s CEO Jeffrey DeBoer. “Some concepts, however, may have unintended consequences. For example, our capital markets today are the envy of the world. Entrepreneurs are able to access debt amounts needed to provide their businesses with flexibility to build, operate, and grow their businesses. We should continue that and not end the deduction for business [interest] expense.” (Jeffrey DeBoer, “Statement For Senate Finance Hearing On Business Tax Reform,” Senate Finance Committee, 9/19/17)

Equity Financing Is “Simply Not Available” For Many Businesses, Per American Institute Of Certified Public Accountants (AICPA) Former Chair Troy Lewis. “Another important issue for small businesses, as well as for professional service firms, is the ability to deduct interest expense. New business owners incur interest on small business loans to fund operations prior to revenue generation, working capital needs, equipment acquisition and expansion, and to build credit for future loans. These businesses rely on financing to survive. Equity financing for many start-up businesses is simply not available. A limitation in the deduction for interest expense (such as to the extent of interest income) would effectively eliminate the benefit of a valid business expense deduction for many small businesses, as well as for many professional service firms. If a limit on the interest expense deduction is connected with a proposal to allow for an immediate write-off of acquired depreciable property, it is important to recognize that this combination adversely affects service providers and small businesses while offering larger manufacturers and retailers a greater tax benefit. As a result, business formations by small start-ups are hindered.” (Troy Lewis, “Written Statement For Senate Finance Hearing On Business Tax Reform,” Senate Finance Committee, 9/19/17)

AICPA’S Troy Lewis Emphasizes That Replacing Business Interest Deduction With Full Expensing Would “Not Provide Any New Benefit For Small Businesses.” “Currently, small businesses can expense up to $510,000 of depreciable acquisitions per year under section 179 and deduct all associated interest expense. One tax reform proposal10 under consideration would eliminate the benefit of interest expense while allowing immediate expensing of the full cost of new equipment, and depreciable real estate, in the first year. However, since small businesses do not usually purchase large amounts of new assets, this proposal would generally not provide any new benefit for smaller businesses (relative to what is currently available via the section 179 expensing rule). Instead, it only eliminates an important deduction for many businesses, which are forced to rely on debt financing to cover their operating and expansion costs.” (Troy Lewis, “Written Statement For Senate Finance Hearing On Business Tax Reform,” Senate Finance Committee, 9/19/17)

Equity Financing Is Largely Unavailable For Many Businesses, According To Troy Lewis Of AICPA. “Another important issue is the ability to deduct interest expense. Business owners borrow to fund operations, working capital needs, equipment acquisition, and even to build credit for future loans. These businesses rely on financing to survive. Equity financing for many start-up businesses is simply not available. At a minimum we should not take away or limit this critical deduction for many small and mid-sized who with little or no access for equity capital are often forced to rely on debt financing.” (Troy Lewis, “Testimony For Senate Finance Hearing On Business Tax Reform,” Senate Finance Committee, 9/19/17)

By | 2017-09-22T17:21:44+00:00 September 22nd, 2017|News|