4-2 Short Paper. Shifting Corporate Debt

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1 Shifting Corporate Debt Valerie Smith SNHU TAX-670-X1459 Tax Research Methodology 23TW1 Joseph R Palombo October 14, 2023

2 Shifting Corporate Debt The U.S. tax system is updated or modified with new leadership, either with the enactment of other tax laws or modification of the existing ones. For instance, Trump's leadership resulted in the implementation of the Republican Tax Plan that focused on aspects such as lowering corporate taxes, reducing inheritance tax, and dropping overseas profits ( Sargen, 2018). Changes in congressional and presidential leadership greatly influenced the 2017 Tax Cuts and Jobs Act (TCJA). Remarkably, tax law changes are implemented after acquiring consent from the President, the House of Representatives, and the Senate. Donald Trump's leadership was associated with the establishment of the 2017 TCJA, which affected businesses’ way of accounting for their debts ( Sargen, 2018). Business interest deductions were modified and limited through the TCJA. In 2018, interest deductions were restricted to 30% of the business’s adjusted taxable income ( Simms et al., 2018). This constraint increases tax liabilities for firms with excessive debt and discourages dependency on excessive debt. Moreover, TCJA modified capital asset expensing from being fully deductible by extending the capital asset depreciation ( Kalcheva et al., 2020). This move subjected firms to higher short-term tax liabilities associated with capital investments, making it harder for them to expand or raise money. Tax law changes occur constantly and businesses should keep updated to ensure compliance and avoid being fined. Sources for assessing the appropriate tax condition include subscribing to e-News from IRS.gov, Tax Notes Talk, Thomas Reuters Checkpoint, Bloomberg Tax Management Portfolio, and AICPS News. Remarkably, the Internal Revenue Code also provides details of tax law updates for certain situations or topics ( Sawyers & Gill, 2018). Business owners, accountants, and CPAs acquire tax law changes and information from these sources, which help them to evaluate different tax situations. Therefore, having knowledge about

3 tax laws and how to stay updated with all changes is important for business owners and tax professionals. The tax changes witnessed through the TCJA will affect IRC § 163(j) by establishing new restrictions on deductions concerning business interest expense ( Simms et al., 2018). This resulted in businesses being limited to a 30% deduction of their adjusted taxable income (ATI) contrary to the previous tax law that involved full interest deductibility. Under the new IRC § 163(j), ATI cannot be below zero. The IRC § 167(a) will also be modified through the TCJA to revise the standards for capital asset depreciation. The extended depreciation schedules associated with the TCJA spread the capital asset expenses over several years resulting in increased short-term liabilities. Moreover, the new tax changes will result in modification of the IRC § 179(a) by doubling the expensing limit linked with small businesses’’ investments (Sawyers & Gill, 2018). Notably, it allowed bonus depreciation by 100% and simplified accounting guidelines for smaller businesses. I disagree with changes to capital assets’ expenditures and deductibility of interest because they can make business situations complicated. TCJA modified IRC § 163(j) resulting in limitations on business interest expense deductions from 2018 (Frankel & Tan, 2020). Although interest deductibility can enable businesses to lower their taxable income by deducting interest subjected to borrowed finances, I disagree with it because it disadvantages other methods of raising capital, discourages investments, and violates tax neutrality associated with higher costs of capital. Outstandingly, the new tax changes will limit amount of debt businesses may resolve to have in coming years because the interest expense deduction is reduced to 30%. The higher outstanding tax liabilities linked with longer depreciation schedules and the restricted interest deductions adversely affect high-leverage firms (Simms et al., 2018). This influences some

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4 companies to modify their financial strategy such as seeking alternative funding and optimizing expenditure. I think modification of the capital assets’ expenditure and deductibility of interest will discourage industries such as financial institutions and banks from borrowing to expand. These firms depend on the deduction of interest expenditure and deductibility of interest to lower their tax burden. TCJA constraints on interest deductions will advantage borrowing and hinder other ways of developing capital (Kalcheva et al., 2020). Financial institutions and banks will be discouraged from investing because they rely on the deductibility of interest to lower their taxable income. Notably, their financial stability will be damaged resulting in declined income.

5 References Frankel, M., & Tan, J. (2020). How domestic businesses deduct business interest expenses under the new section 163 (j). Global Journal of Accounting & Finance (GJAF) , 4 (1), 90-110. https://www.igbr.org/wp-content/uploads/articles/GJAF_Vol_4_No_1_2020%20pp %2090-110.pdf Kalcheva, I., Plečnik, J. M., Tran, H., & Turkiela, J. (2020). (Un) intended consequences? The impact of the 2017 tax cuts and jobs act on shareholder wealth. Journal of Banking & Finance , 118 , 1-22. https://doi.org/10.1016/j.jbankfin.2020.105860 Sargen, N. P. (2018). Tax Policy: Tax Cuts versus Tax Reform. Investing in the Trump Era: How Economic Policies Impact Financial Markets , 59-76. https://doi.org/10.1007/978-3-319- 76045-2_5 Sawyers, R. B., & Gill, S. L. (2018). Federal tax research (11 th ed.). Boston, MA: Cengage Learning. Simms, K., Smith, J., & Moreschi, R. (2018). First look at the Tax Cuts and Jobs Act of 2017. The CPA Journal. https://www.cpajournal.com/2018/08/06/first-look-at-the-tax-cuts-and- jobs-act-of-2017/

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