Interest deductibility
By the end of 2017, interest deductibility has been limited to maximum 30% of EBITDA. Does this mean that in the Income Statemente we only report interest expenses up to 30% of EBITDA?
No you still have to report total interest expense paid on the IS, you just don't receive a tax shield from interest greater than 30% of EBITDA.
What I thought was that by tax shield, it meant taking out interest expense before taxes (EBIT ---> EBT) in the incime statement. But by doing so, you would still deduct 100% of interest expense.
Does it deduct the 30% in tax accounting calculations?
Say you have EBITDA of 10, D&A of 2 and interest expense of 4. Your EBIT would be 8 and your EBT would be 4. However, when you are calculating taxes you would multiple your effective tax rate by a taxable base of 5 (EBIT of 8 less the maximum interest deduction of 30% of EBITDA). Assuming a 30% tax rate you would have taxes of 1.5. Therefore, your net income would be 2.5 (EBT of 4 minus taxes of 1.5).
As far as tax vs. book i'm not sure if the rule affects each set of financials differently.
To piggyback off weezyfgrady, the amount of business interest expense disallowed as a deduction in the current year is carried forward to the next taxable year (a “disallowed business interest expense carryforward”).
First of all, correct that it's GAAP vs Tax accounting.
Maximum interest deductible is actually 30% of EBITDA through 2020 and 30% of EBIT in 2021 afterward, which significantly further lowers the cap. (In reality it's not really EBITDA or EBIT but a metric called Adjusted Taxable Income "ATI" which closely approximates these two).
How does it work? Maybe easiest to understand with a high level example.
Before the law: Let's say you have $100 in EBITDA, $80 in EBIT, $40 in interest expense, Therefore $40 in EBT, at a 25% tax rate that's $10 in tax and $30 in Net Income.
Now: $100 EBITDA * 30% deductibility = $30 maximum interest expense for tax purposes. Therefore new EBT for tax purposes is $80 EBIT - $30 max deductible int exp = $50 EBT. 25% tax rate is $12.5 taxes.
2021 onward, your deductibility is $80 EBIT * 30% = $24. New EBT for tax is $80 - $24 = $56. 25% of that is $14 in cash taxes. If you had massive D&A then the effect would be more limiting.
++ a lot of other tax changes including corporate tax rate, NOL changes, expensing on qualified equipment, repatriation, foreign dividends, and GILTI (Global Intangible Low-Taxed Income) / BEAT (Base Erosion Anti-Abuse Tax)
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