Modeling section 163(j)

[codykallen]

This issue is to discuss two options for modeling the new section 163(j) limitation on interest expense. It limits the deduction to interest paid to the sum of interest income, floor plan financing (not relevant in general), and 30 percent of adjusted taxable income. Adjusted taxable income is taxable income before:

• Business interest income or expense
• Net operating loss deductions
• Income or deductions not allocable to the trade or business (not relevant)
• Depreciation, amortization or depletion (prior to 2022) Interest expense in excess of the limitation becomes interest expense the following year.

The major problem with explicitly modeling this provision is that the revenue relies on firm heterogeneity, and thus representative firm approaches will not well, and may not work at all. For example, using representative firms for each major industry, the limitation is only binding in the following industries beginning in 2022 (and in no industries prior to then):

• Utilities
• Printing and related support activities
• Transit and ground passenger transportation
• Hospitals, nursing and residential care facilities The resulting estimates for the fraction of interest paid deductible are still close to 1, but should be in the ballpark of 0.8.

Simply using the fraction of interest deductible policy parameter likely gets closer to the actual effect of the provision, but could have incorrect implications for modeling responses (although perhaps not unreasonably so).

[codykallen]

It turns out that the limit mostly binds for firms in net loss positions. Other than those, it has little effect on more profitable firms in given year.

[codykallen]

This has been completed for C corporations in #127. It still needs to be implemented for pass-through businesses, but that should be done as part of splitting the pass-through businesses by type.

[codykallen]

This has been implemented for the corporate sector. This will be implemented for pass-through businesses after they are split by type.