As Congress debates what should be included in the 2025 budget, any final proposal must include the restoration of the Tax Cuts and Jobs Act (TCJA) earnings before interest, taxes, depreciation, and amortization (EBITDA) tax provision, which deals with the deductions businesses take on interest payments. The EBITDA provision, like other TCJA business expensing provisions including R&D amortization and bonus depreciation, plays an important role in encouraging U.S. investment and fostering job creation and should be a high priority for lawmakers.
The TCJA famously amended Section 163(j) of the Internal Revenue Code to limit the deduction for net business interest expense to 30 percent of earnings before interest, taxes, depreciation, and amortization. This incentivized capital-intensive industries like manufacturing, transportation, mining, and real estate businesses with significant depreciation and debt service, to make longer-term investments. That’s because the tax provision allowed them to take any interest on loans below 30 percent as a deduction against their taxable income in the year the payments are made, and any interest over that threshold to be carried over to a future year.
Unfortunately, this pro-growth EBITDA provision was allowed to expire in 2022, meaning business interest deductions are now limited to 30 percent of earnings before interest and taxes (EBIT). In other words, depreciation and amortization expenses are excluded from interest deductibility calculation. This makes it more difficult for businesses to borrow money, hire workers, and raise wages. In fact, a recent EY study found that the switch from EBITDA to EBIT will cost the American economy 467,000 jobs, $23.4 billion in employee compensation, and $43.8 billion in GDP—two-thirds to three-quarters of which will be felt within 10 years. Restoring the EBITDA-based deduction would not only prevent these losses, but also encourage long-term business investment in depreciable assets like equipment and intangible assets like intellectual property.
Many businesses agree. A recent survey of manufacturers found that 94 percent believe that it is important that the federal tax code reduce the cost of “accessing capital” through business loans and investing in capital expenditures, with 58 percent reporting that it is “very important.” In contrast, 78 percent of manufacturers reported that “increasing the after-tax cost” of taking out loans harms their ability to grow their business. Another poll conducted by the American Chemistry Council is equally revealing. Among member companies surveyed, 41 percent stated that the pre-2022 EBITDA-based deduction led them to increase their capital investment in the U.S., with 33 percent reporting that the failure to restore it would lead them to reduce their investment, and 19 percent revealing they would be forced to reduce or move operations overseas.
Perhaps that’s why American businesses continue to write letters to Congress, pleading with lawmakers to reinstate the EBITDA-based standard. They know that the status quo is unacceptable and that the longer the U.S. fails to act, the longer it will remain a global outlier among Organization for Economic Co-operation and Development (OECD) nations. Indeed, among the 35 countries worldwide with an earnings-based interest limitation, only the U.S. has an EBIT-based standard. This puts America at a unique disadvantage when trying to attract new investment, and harms some of the very industries that the new administration has prioritized revitalizing.
Congress has a once-in-a-lifetime opportunity to extend the most important aspects of the TCJA, and it needs to make the most of it. That means restoring the EBITDA-based standard in Section 163(j) of the tax code, so that America can fully realize its economic potential. While a permanent extension of the tax provision is preferable, even a temporary multi-year extension would be welcome.
Nate Scherer was the the Director of Finance Policy at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.