On Dec. 20, 2017, the House of Representatives by a vote of 224 to 201 passed the most significant tax legislation in more than three decades. The Senate passed the same legislation earlier in the day.

Although the impact of all the changes contained in the legislation is not known, the most significant change affecting leveraged finance markets — interest deductibility — is now known.

As more fully described in the Conference Report for the legislation (H.R. 1 Tax Cuts and Jobs Act), the deduction of net interest expense (i.e., interest expense in excess of interest income) for corporate borrowers1would be capped at 30 percent of “adjusted taxable income.”2

  • For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2022, adjusted taxable income is computed without regard to depreciation and amortization (and thus is akin to EBITDA).3
  • For taxable years beginning after Jan. 1, 2022, adjusted taxable income reflects depreciation and amortization (and thus is more akin to EBIT).
  • The amount of any interest expense not allowed as a deduction in any taxable year may be carried forward indefinitely.