With a lagging economic hangover from the Biden Administration, Main Street businesses could use a shot in the arm to boost the economy. That’s what legislation introduced by Sen. Shelley Moore Capito (R-WV) and Rep. Adrian Smith (R-NE), the American Investment in Manufacturing and Main Street Act would accomplish, by rolling back a punishing change to interest deductibility. Businesses regularly expand operations through buying property, building factories, and hiring workers by betting on growth through taking on debt. Interest on that debt then becomes an important consideration for their future economic outlook.
An important tax incentive for this critical economic behavior is through the 163(j) provision of the Internal Revenue Code. Before 2022, this provision allowed businesses to deduct up to 30% of their Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA). This is a commonly used financial term that reflects a business’s general financial health based on its profitability. Using the full EBITDA measurement ensures that businesses are able to maximize the deduction they’re eligible for on their debt/expansion costs. This incentivizes positive economic behaviors for the entire economy—Main Street needs access to capital to build data centers, factories, new headquarters, and create jobs.
However, after 2022, this measure changed to only allowing taxpayers to deduct against Earnings Before Interest and Tax, meaning companies with significant depreciation (physical assets) and/or amortization (non-physical assets) on their income statements were unfairly punished. Companies big and small with large physical footprints are particularly impacted—often large expenditures for expansions of factories, warehouses, and power generation are financed by banks in the form of debt, interest on which makes up a substantial cost for the business. This bill from Sen. Capito and Rep. Smith would resolve this issue by rolling back this change retroactively to 2022, restoring fairness for these Main Street job creators and ensuring more economic growth through capital markets.