Before the end of the year, lawmakers will address several business tax provisions in a “tax extenders” package. One such provision is the limitation on the deductibility of business net interest expense introduced in the Tax Cuts and Jobs Act (TCJA). This year, the limitation tightened as scheduled and further limited interest deductions. Although imperfect, a limit is good policy, and lawmakers should avoid increasing the ability of firms to deduct interest expense.

Section 163(j) limits the deductibility of net interest expense for businesses to 30 percent of adjusted taxable income. From 2018 to 2021, adjusted taxable income was equal to earnings before interest, taxes, depreciation, and amortization (EBITDA). Starting this year, the definition of adjusted taxable income changed to earnings before interest and taxes (EBIT). This narrower definition of income means that firms face a stricter cap on net interest expense.