Section 163(j)

No one paid a lot of attention to Section 163(j) when it was passed back in 2017.  The limitation it applied to interest expense deductions – 30% of a taxpayer’s EBITDA – just didn’t come into play very often.  Interest rates were low and the addback of tax depreciation and amortization resulted in a threshold that only rarely impacted a taxpayer’s interest expense deduction.

Things are very different today.  The provision automatically adjusted in 2022 to reduce the interest expense limitation to 30% of EBIT and the Fed started playing with interest rates in an effort to slow down inflation.

As a result, taxpayers across the country are getting hit with additional tax liability in a time of reduced cash flow. 

At Acta Consulting, we can’t do a whole lot about borrowing costs, but we can do something about the non-deductibility of your interest expense.  Specifically, we structure acquisitions in such a way that any newly acquired amortization and depreciation can be excluded from the calculation of EBIT, effectively returning to the pre-2022 limit of 30% of EBIT.   For many of our clients, that added cash flow can be the make or break factor in a deal.