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U.S. Companies Could Lose $1 Trillion if Corporate Interest Tax Deduction Eliminated

Mid-market corporations in the U.S. could lose up to $1 trillion in equity value if the ability to deduct interest expenses is eliminated, according to a new study.

The financial investigations company RGL Forensics conducted the study in collaboration with the Association for Corporate Growth. According to the study, if the corporate interest tax deduction were eliminated with no offsetting benefits, this would lead to a 6.3 percent drop in equity value for U.S. middle-market enterprises, destroying more than $1 trillion of equity value. If even a 0.5 percent decrease in growth resulted, equity values would decline by 15.3 percent, translating to value destruction of approximately $2.5 trillion.

The study examined U.S. mid-market businesses with between $10 million and $1 billion in annual revenue. They account for nearly 48 million jobs and generate $10 trillion in combined revenue.

The impacts of the deduction were especially large for consumer discretionary, energy, healthcare, materials and telecommunication services companies, but were less pronounced for companies in the consumer staples, industrials and information technology sectors.

RGL Forensics partner Matthew Morris presented the study, “Eliminating the CIT Deduction: Valuation Implications for The Middle Market,” at the Association for Corporate Growth’s 2016 InterGrowth Conference in New Orleans.

“Eliminating the corporate interest tax deduction would create significant risks for middle market companies, which is a vital segment in the U.S. economy,” Morris said in a statement. “We conducted this study to help inform the discussion surrounding this critical tax issue. While it is unlikely we can fully predict all of the ways that eliminating the CIT deduction would affect companies, its central role in valuations and capital spending decisions warranted the analysis.”

As appeared on AccountingToday.com, May 2016.

*Effective December 2018, RGL Forensics joined Baker Tilly Virchow Krause, LLP. This article was published while we were RGL Forensics. The author(s) or team member(s) quoted from RGL are now employees of Baker Tilly.

Matthew R. Morris
Managing Partner, CFA, CLP

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