The U.S. Internal Revenue Service (IRS) moved on Tuesday to ease thetax burdens of private equity portfolio companies and heavilyindebted industries.

Prior to President Donald Trump's 2017 tax-code overhaul,interest expenses were generally fully deductible. The Trump taxlaw capped tax deductions for debt interest payments at 30 percentof EBITDA (earnings before interest, taxes, depreciation, andamortization).

The new arrangement, laid out in 575 pages, reflects a temporarybump in the cap, to 50 percent through year-end. In addition, theTreasury will no longer apply a limit on some transactions thatdon't officially take the form of a loan, but that potentiallycould be used to skirt the deduction cap. Included in thatclassification are debt-issuance costs, commitment fees, and somehedging gains and losses.

Tuesday's move aside, a looming hit to high-debt businessesremains in place. The 2017 law included a provision for limitingcorporate tax breaks starting in 2022. That change will havedepreciation and amortization—deductions based on the value of abusiness's property—no longer included in the earnings total that'sthe basis of how much a company can write off.

Enacting that step will shrink the amount of interest that acompany can deduct, though leftover interest expenses could becarried over as a tax break in subsequent years.

The National Association of Manufacturers (NAM), a lobbyinggiant that had already pushed lawmakers to put a stop to the 2022move before Covid-19 struck, is now framing the demand as far moreurgent. "Without revenues coming in while you're still operating,debt financing becomes more and more critical," said Chris Netram,vice president of tax and domestic economic policy at NAM.

Netram said his group wants the upcoming fiscal-stimulus bill toinclude a provision that eliminates the tightening of the limit.Earlier this year, NAM released policy objectives for the long-termpost-pandemic recovery that included legislation to prevent the2022 change.

The private-equity world also had its eyes on this issue wellbefore the pandemic struck. Corporate takeovers by such firms tendto load the targets up with debt as part of the deal. If debtpremiums surge, that could leave those businesses in trouble.

While the Federal Reserve's policy rate may currently be at rockbottom, corporate borrowers will still face relatively highborrowing costs because the crisis makes them riskier investments,said Vipul Amin, a managing director of Carlyle Group, who calledthe planned interest-limit change "salt in the wound" created bythe pandemic crisis.

"If you have any risk associated with you, there's a biggerpremium than there was before," Amin said. He said his anticipationof a "death spiral" of low earnings and higher after-tax debtfinancing costs in face of recession was now coming tofruition.

The impending 2022 change hardly damped interest in selling debtbefore Covid-19. The ratio of publicly traded, nonfinancialcompanies' debt to assets hit the highest level in two decades atthe start of this year, according to a Fed report in May. For themost highly leveraged firms, the Fed found, the ratio of debt toassets was "close to a record high."

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