Interest Deductibility: Part Of “The Lifeblood” Of Small Businesses

Last week, the House Small Business Committee held two hearings on the regulatory and tax burdens facing start-ups and small businesses. One of the important topics they discussed was interest deductibility (ID) and its key role in supporting businesses.

Small businesses account for nearly 99.7 percent of U.S. employer firms — and about 64 percent of new job creation. Many of these firms rely on credit to fund their growth and expansion, and interest deductibility helps them achieve those goals.

During the first hearing, entitled “Start-ups Stalling? The Tax Code as a Barrier to Entrepreneurship,” Troy Lewis, testifying on behalf of the American Institute of CPAs noted that:

“Equity financing for many start-up businesses is simply not available. A limitation in the deduction for interest expense (to the extent of interest income) would effectively eliminate the benefit of a valid business expense for many small businesses, as well as many professional service firms.”

Later, when asked by Chairman Chabot “How critical is interest deductibility to entrepreneurs?” Lewis responded: “The ability for small businesses to grab equity capital is limited, and borrowing is simpler and is in effect the lifeblood of small businesses. Small businesses and startups run on incredibly thin margins and have operating loses up front, so every dollar matters. Interest deductibility is critical to entrepreneurs.”

Additionally, Lewis pointed out that businesses are already allowed to immediately expense up to $500,000. So proposals to eliminate ID in favor of 100% expensing provides little additional benefit, while imposing a new tax on businesses, hurting job growth and economic activity.

At a separate hearing the following day entitled, “State of the Small Business Economy,” Dr. Stan Veuger, a resident scholar at the American Enterprise Institute, stressed in his testimony that Congress negatively impacts business growth when there are high levels of uncertainty surrounding policy implementation.

“Baker et al. (2016), for example, show that higher policy uncertainty from 2008 on was associated with a deeper and longer recession… This type of policy uncertainty is of particular concern to small businesses, which are, in a sense, more risk averse by sheer size — typically less diversified than multinational firms,” he said.

If Congress is serious about providing certainty for businesses to invest, then the current tax treatment of business interest expense must be maintained.