When U.S. Senate lawmakers changed just two letters used for a calculation in their proposed tax bill, they may have increased the number of junk-rated companies that would be hurt by tax overhaul.
Legislators in both the House and Senate are looking to cap a commonly used corporate deduction to help limit the cost to taxpayers of the tax cuts they plan. Under current rules, companies can deduct 100% of their interest payments from their taxable earnings, while under new proposals, borrowers would only be able to deduct interest equal to less than 30% of a measure of their income.
The devil is in how earnings are measured. For the House bill, it's essentially earnings before interest, taxes, depreciation, and amortization, a commonly used metric of a company's performance known as Ebitda. The Senate bill uses a gauge closer to Ebit, which includes depreciation and amortization expenses and therefore is a lower number for most companies. By using a form of earnings just two letters different from the House measure, the Senate bill would allow borrowers to deduct less interest and potentially pay more taxes.
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