Tax

Congress allowed a pro-growth standard for interest deductibility to lapse in 2022—and manufacturers are already feeling the effects, according to a new NAM explainer.  
 
What’s going on: Thanks to 2017 tax reform, from 2018 to 2021 manufacturers were allowed to deduct interest on business loans up to a cap of 30% of their earnings before interest, tax, depreciation and amortization (EBITDA). As of 2022, however, manufacturers’ interest deductions are capped at 30% of their earnings before interest and tax (EBIT).

• The result: a lower cap on how much interest companies can deduct, which means manufacturers effectively pay more to finance vital investments.   

How it works: “The difference between a company’s EBITDA and EBIT are its depreciation and amortization expenses,” according to the explainer, part of the NAM’s “Manufacturing Wins” campaign.

• “Manufacturers make significant long-term investments in depreciable assets (such as equipment and machinery) and intangible assets subject to amortization (such as intellectual property), so these businesses experience a substantial delta between their EBITDA and EBIT—and thus face a much stricter interest deductibility limit under an EBIT-based standard.”

Why it’s a problem: The more stringent cap has a disproportionate impact on manufacturers, with 77% of the impact falling on manufacturing and related industries—limiting manufacturers’ ability to expand their businesses.

• Also, of the 35 countries with an earnings-based interest limitation, the U.S. is the only one that uses an EBIT-based standard, putting America at a competitive disadvantage in attracting new investment.  

What we need: “Congress must act to restore a pro-growth, EBITDA-based interest deductibility standard,” said NAM Vice President of Domestic Policy Charles Crain. “Reversing the EBIT-based restriction will ensure that manufacturers can avoid increased financing costs and reduced liquidity—enabling capital investments throughout the industry.”