For years beginning before 2022, the adjusted taxable income (ATI) of a business includes an addback of any deductions for depreciation, amortization, or depletion (the “addback”). The determination of ATI with the addback is meant to approximate a tax measure of earnings before interest, taxes, depreciation, and amortization (EBITDA).
It is noteworthy that many of the United States’ trading partners, including the United Kingdom, Germany, and France, employ a business interest limitation based on a fixed percentage of EBITDA. This is also a recommended approach discussed in the OECD/G20 Final Report on Action 4 of the Base Erosion and Profit Shifting (BEPS) Project.
After 2021, the U.S. addback is scheduled to expire. Consequently, businesses will have their interest expense limited solely based on their earnings before interest and taxes, without adding back their depreciation, amortization or depletion deductions. The result is that capital-intensive businesses will be more restricted in financing their operations, which will hamper and may preclude new capital investment.
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