Economic Impacts of Stricter 163(j) Interest Expense Limitation

This report is a technical analysis that estimates the economic impact of the stricter 163(j) interest expense limitation on the US economy. It specifically examines the transition from an EBITDA-based limitation to an EBIT-based limitation that took effect in 2022. The analysis highlights that the stricter limitation is expected to significantly increase the amount of disallowed interest expense, which is projected to rise from 7.5% under the previous limitation to approximately 15% under the new framework. This change is anticipated to adversely affect economic activity, leading to a reduction in jobs, employee compensation, and GDP. The report details that before market adjustments, the estimated reductions include 867,000 jobs, $58 billion in employee compensation, and a $108 billion decrease in GDP. Furthermore, the report utilizes the EY Macroeconomic Model to simulate market responses to these policy changes, indicating that the negative economic impact will grow over time. The analysis also discusses the implications for various industries, particularly manufacturing and information sectors, which are expected to bear a significant burden from the stricter limitation.