Calvin H. Johnson (Texas), Annex and Errata on Ceiling on Interest Deductions, 177 Tax Notes Fed. 1251 (Nov. 28, 2022):
In this article, Johnson supplements his argument that interest deductions should be limited to a ceiling of the interest rate times adjusted basis, and he clarifies when the remedy is inappropriate, that capitalization doesn’t remedy the negative tax harm, and that all exempt income should be subtracted from adjusted basis for the ceiling calculation [Interest Ceiling Must Be Adjusted Basis Times Interest Rate, 176 Tax Notes Fed. 1987 (Sept. 26, 2022)].
Summary
The interest ceiling report argued that we need to end the negative tax subsidy arising from a mismatch in our treatment of debt and expensing investments by limiting the deduction of interest to a taxpayer’s adjusted basis in all assets times the interest rate. This article supplements that argument by saying:
- Loans like those for planting and seeds that are repaid at harvest by year-end are not the target of the ceiling. The problem is limited because basis from any source will justify the interest deduction, but interest on loans paid by year-end would properly be deducted without regard to the basic limitation of interest times adjusted basis ceiling.
- The negative tax might in theory yield a reduced yield, and a higher price for tax-advantaged investments. That is a waste of capital, however, because it distorts investment away from real demand, identified by pretax revenue. Capitalization is likely to be partial, yielding some perhaps small reduction in the taxpayer-investor’s inequity from the negative tax and also some inefficiency.
- Exempt income of all kinds must reduce the adjusted basis in the calculation of the ceiling.
All three of those points were best addressed in the original interest ceiling report. Clarification of the points here, however, strengthens rather than undercuts the original report.
