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Brady promises grandfathering and carve-outs for limits on interest deduction

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Tax Hot TopicsHouse Ways and Means Chair Kevin Brady, R-Texas, provided new proposals to adjust his tax reform proposals in order to both limit the interest deduction and implement a border adjustment tax.

The House Blueprint released last June would allow for full expensing of business investments, but in exchange, would deny deductions for interest expense in excess of interest income. Transition rules were always expected, but it was unclear whether this meant a phase-in on an annual basis or if pre-existing debt would simply be exempt. Brady recently revealed that he supported “grandfathering,” which would allow taxpayers to continue to deduct interest on pre-existing debt. The announcement could encourage taxpayers to load up on long-term debt now, but uncertainty over the effective date could dampen enthusiasm. Grandfathering provisions are often made retroactive to the date of introduction to prevent tax-motivated gaming.

Brady also proposed new exceptions for regulated utilities, for small businesses that already have full expensing under Section 179, and for land -- because land could not be expensed under the bill. The blueprint already promised general exceptions for the financial and insurance industries.

The proposal to limit interest deductions has proven somewhat controversial, but has not run into the kind of opposition that has all but killed a proposed border adjustability tax. Brady, in an effort to salvage the border adjustment proposal, offered several new tweaks.

The latest changes would provide a five-year transition and exempt certain services. While transition relief was expected, the proposed carve-outs are a surprise. He previously refused to consider exempting any industries, even those with materials that simply cannot be sourced in the U.S. He is now proposing to fully exempt services where the location of the service is not always clear.

“Our proposal will reflect the special circumstances of some of our services — financial services, shipping, communication, digital-type services and insurance,” Brady said.

None of the proposed changes appeared to soften opposition. Key Republican lawmakers indicated they remain opposed, and it is hard to see how the provision survives.

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Mel Schwarz
Partner, Washington National Tax Office
T +1 202 521 1564

Dustin Stamper
Director, Washington National Tax Office
T +1 202 861 4144

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