Tax Reform and Equipment Acquisition: What You Need to KnowJanuary 1, 2019
Tax reform via the Tax Cuts and Jobs Act of 2018 (TCJA) is bringing many changes, but the tried-and-true benefits of leasing equipment remain unchanged. Equipment financing continues to provide:
- Enhanced cash flow, allowing you to avoid large out-of-pocket costs and effectively manage cash from operations;
- Unparalleled flexibility and asset-management features, including options to keep equipment in place for the long haul or upgrade to new technology; and,
- Preservation of credit lines to support day-to-day business operations rather than long-term capital needs.
While the benefits of equipment financing continue, it’s important to consider how tax reform is changing the playing field.
Continued Tax Savings
Most equipment offers depreciation benefits. Historically, the most common equipment financing options—loans, nontax leases and tax leases—allowed equipment owners to deduct equipment-depreciation expenses from taxable income, which significantly lowered their tax liabilities. Fortunately, the TCJA doesn’t eliminate this benefit. However, selecting the option that optimizes your business’ tax strategy is key.
The centerpiece of the TCJA—a reduction in the maximum corporate tax rate from 35 to 21 percent—dramatically reduces tax liability for many manufacturers. Additionally, the range and size of available corporate-tax deductions has expanded. The combination of these two changes begs an important question for most businesses: How many deductions realistically can be absorbed going forward?
Consider These Tax Deductions and CreditsDetermining the tax deductions and credits that will best benefit your business will be time well spent. Here are some areas to consider:
100-Percent Expensing—For equipment placed in service after Sept. 27, 2017, and before Jan. 1, 2023, the tax-reform bill has eliminated the bonus-depreciation feature. Instead, those who invest in qualified equipment during that time simply can expense 100 percent of the equipment cost in the first year of ownership.
This unprecedented benefit offers a huge windfall for businesses with sufficient taxable income to claim it. That said, the benefit of such a write-off has less impact in a 21-percent corporate-tax environment than in a 35-percent tax environment. Therefore, some businesses might be unable to absorb all of the depreciation benefits available to them. As a result, even full taxpayers now could find that a tax lease allows them to monetize otherwise unused depreciation benefits by trading them in for a lower after-tax cost to acquire equipment.
Note that the temporary increase in expensing allowance now also applies to pre-owned-equipment purchases. Additionally, the 100-percent expensing benefit will begin to phase out in 2023.
Interest Expense Deduction—The TCJA now places limits on deductions related to interest accruals and payments made on debt in a given tax year. Unfortunately, this could negatively affect heavy borrowers and those investing in business growth and expansion activities. Equipment leasing could help to offset the pain, however, because rental payments arising from a lease are not included in this calculation.
Investment Tax Credit (ITC)—Particularly in the area of clean-energy investments, ITC has offered many businesses an affordable means to achieve greener, energy-efficient power generation. After much debate, the tax-reform legislation did not modify ITCs currently available for solar, wind and other forms of alternative energy. For instance, solar-energy systems placed in service before 2020 generally are eligible for a 30-percent ITC, and available tax credits still will phase out slowly after 2020.
Section 179—Traditionally, Section 179 allowed businesses with limited capital acquisitions to expense 100 percent of the cost of new and pre-owned equipment in the first year of ownership. Owners could expense as much as $500,000 in cost, as long as a business’ total equipment investment for the year did not exceed $2 million. For investments totaling more than $2 million, the deduction declined on a dollar-for-dollar basis.
The TCJA permanently increased the deduction to $1 million beginning in 2018, on an equipment-investment limit of $2.5 million. Section 179 always has applied to new- and pre-owned-equipment purchases, which previously was a significant distinction from bonus depreciation. However, the tax-reform changes to Section 179 are both permanent and now applicable to a broader set of assets, including HVAC and ventilation systems, and fire-protection and security systems.
Find an Expert in Equipment Leasing
To develop the most profitable acquisition strategy, consult with an equipment-financing expert. Now more than ever, it’s imperative to seek a professional with a tenured history in lease structuring, in-depth knowledge of the equipment specific to your business, and an understanding of your business goals. MF
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