May 11, 2017

The White House gives private equity a tax scare

(Manuel Balce Ceneta/AP)

The private equity industry received a fright on Thursday, with both President Trump and Treasury Secretary Mnuchin saying that the White House remains open to changing one of the industry's key drivers of investment returns: The deductibility of corporate interest.

What's the issue? Private equity firms usually finance their acquisitions via bank loans all of which are put onto the books of the purchased company. The company currently gets to deduct 100% of the interest on those loans. This rule also applies much more broadly, such as a small business getting to deduct the interest on a loan taken out to purchase new equipment.

Policy: The White House did not at all address this issue in its tax reform proposals, leading the private equity industry to believe the 100% deductibility would remain intact.

Then came this exchange via The Economist, suggesting that the matter remains unsettled:

Will you keep interest deduction in the corporate tax? Will corporate interest payments…Trump: Do you want to answer?Mnuchin: We're contemplating it. We're contemplating it.Contemplating getting rid of it?Mnuchin: No, we're contemplating keeping it. That's our preference. But we'll look at everything.So what would your preference be Mr President? You know about that very well.Trump: No, I would say probably…I think we're contemplating is the word. And it hasn't been determined yet, but we're contemplating.

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