US tax framework confirms limits to interest deductibility

The requirement that interest be included in taxable income could force private fund managers to adjust their strategies.

Interest deductibility will be limited as part of US tax reform, but private fund managers will benefit from lower corporate tax rates, according to a document released by the government on Wednesday.

The nine-page US Tax Reform Framework says the deduction for net interest expenses “will be partially limited.” Congressional tax-writing committees have to decide by how much, but 30 percent is the widely-touted figure.

Currently, private fund managers can deduct interest expenses from taxable income, making the leveraged buyout model attractive. The change will have huge implications, with Blackstone already saying it could force the firm to adjust its funds’ investment strategies and potentially lower returns for investors.

“Debt is an essential tool used by companies to grow and finance operations adding that interest deductibility has appropriately been a fundamental part of the income tax code for 100 years,” the American Investment Council said.

The Framework detailed a corporate tax rate cut from 35 percent to 20 percent, and said pass-through businesses, such as private fund limited partnerships, would have their tax rate capped at 25 percent.

A corporation tax cut would likely increase the number of private equity deals and the price people are willing to pay, but this could be offset by the restriction on deduction of interest, lawyers at Miller & Chevalier Chartered said.

The framework made no mention of changes to tax on carried interest, but did reference “special tax regimes” that apply to “certain industries and sectors.” It said these rules will be modernized to ensure that the tax code better reflects economic reality and that “such rules provide little opportunity for tax avoidance.”

Full legislative proposals are expected to be released by November.