The private equity industry will likely breathe a big sigh of relief after digesting President Trump’s tax plan, says UCLA law professor Steven Bank.
Trump’s plan — unlike House Speaker Paul Ryan’s — gives PE firms the continued option to deduct interest on loans from their taxes, according to a March 16 Kramer Levin report that analyzes what it believes is Trump’s tax reform plan.
PE firms buy companies through leveraged buyouts structuring acquisitions like mortgages. The critical difference is that while we pay our mortgages, PE firms saddle the businesses they buy with the loans, making them responsible for repayment.
PE firms own companies employing roughly 10 percent of nongovernment employees, and at least three-quarters of the businesses they own would be hurt if interest deductibility were eliminated, Richard Farley, a partner at Kramer Levin, told The Post.
In his plan, Trump gives companies the option to either forgo interest deductions on future loans and obtain the benefit of immediately deducting capital expenditures rather than depreciating them over time, or retaining interest deductibility.
Ryan calls for eliminating the 100-plus-year-old interest deduction, believing debt should not be more valuable than equity.
The average non-investment-grade company would pay more than double its current federal income tax rate under the Ryan plan, Farley said.
“I think leveraged buyouts are structured assuming there is this deduction,” UCLA’s Bank said.
Bank believes the president has taken a pragmatic approach so that he does not offend powerful private equity firms or the companies that want to spend on capital investments, because his plan has the option for either tax treatment.
Meanwhile, the Trump plan for many reasons is expected to reduce federal tax revenue by $6.2 trillion over the first decade, while the Ryan plan would reduce tax revenue by a much smaller $3.1 trillion, Farley says.