Private-equity firms are bracing for a fight next month over the lifeblood of their business — the deductibility of interest paid on debt, The Post has learned.
Washington lawmakers, scrambling to close budget gaps and trim the deficit, will consider limiting or eliminating the ability of PE-owned companies to deduct from their taxes the interest on their loans, sources said.
PE firms, which own companies employing 1 out of 10 Americans, have sidestepped about $127 billion in US taxes since 2000 via this deduction.
“I basically believe [the tax break] will be affected in tax reform,” a well-placed DC source who works for the PE industry said.
Interest deductibility may end for junk bonds and mezzanine loans, although lobbyists might persuade legislators to keep the exemption for bank loans, the source added.
“I think there is a growing consensus” among Republicans and Democrats to get some corporate tax reform done, Sen. Rob Portman (R- Ohio) said recently, without specifically addressing the interest deductibility issue.
By deducting interest on loans, PE-backed companies slash their tax rates by more than half, according to a 2010 study from Notre Dame Professor Brad Badertscher.
Interest tax deductibility is aimed at helping firms expand by hiring more workers or buying new equipment, and not to fund acquisitions.
A partner at a large PE firm who said corporate interest tax deductibility is on the table believes the complexity of debt financing may muddle the issue enough to stop action.