medium · Private Equity & LBOs

If a borrower is subject to interest deductibility limitations under Section 163(j), how does this specifically alter the CFO impact of PIK interest?

1. It forces the PIK interest to be paid in cash immediately to satisfy tax requirements
2. It has no impact because PIK interest is never tax-deductible until the loan is repaid at maturity
3. It increases the cash flow because the company is no longer allowed to recognize the expense on the Income Statement
4. It reduces the tax shield provided by the PIK expense, resulting in lower cash flow than if the interest were fully deductible

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