The Impact of Tax Cuts and Jobs Act on Equipment Financing In the U.S
In the past few years, it is remarkable how the overall business investment has been growing along with the American economy. Entrepreneurs with investments in various types of equipment are also striving to keep pace. A report by the U.S. Equipment Leasing & Finance Foundation indicates that investment in equipment will expand with about 10% in the next three years. However, there may be external factors affecting the growth of these investments. Taxation will be one of the major issues when it comes to equipment financing.
Primarily, this is where the Tax Cuts and Jobs Act (TCJA) comes into play. Changes to the Internal Revenue Code under the Tax Cuts and Jobs Act (TCJA) will fuel investment in equipment. This Act was passed at the end of 2017 and has four provisions that will affect equipment financing.
A decrease in tax rates
Expansion of bonus depreciation
Like-kind exchanges elimination
Restrictions on interest deductions
A decrease in tax rates
The TCJA lowered the corporate income tax rate to 21 percent as of January 1, 2018. This flat rate replaces the prior modified rates that were not favorable. The prior rates were 15 percent for taxable income of $50,000 and increased to a minimum of 34 percent for income of $75,000 and above. Notably, this flat rate represents a tax cut for companies of nearly all sizes. In turn, this will enable companies to free up some money for equipment financing.
Expansion of bonus depreciation
After the enactment of the TCJA, the bonus depreciation percentage was increased to 100%. Consequently, companies in the US can now write off the full amount of qualifying purchases within the same year of acquisition. The TCJA expanded the bonus depreciation deduction further to allow used qualifying property and equipment as opposed to not just new.
The inclusion of used qualifying property and equipment is applicable to property acquired and placed in service between September 27, 2017, and January 1, 2023. Of course, this inclusion will have a few exceptions. After that period, the deduction reduces by 20 percent per year and it will be phased out entirely after 2026.
Elimination of Like-Kind Exchanges
Apart from real property and equipment under TCJA, like-kind exchange treatment was eliminated for all property. Nevertheless, this alteration may not always cause an adverse tax consequence. For instance, a business can offset the gain from a taxable sale of equipment with the 100-percent bonus depreciation deduction for the replacement property.
Restrictions on interest deductions
The enactment of the TCJA also put limitations on interest deductions, which generally cannot surpass 30 percent of taxable income. This limitation is only applicable to businesses in the US with average annual gross receipts of about $25 million. From a lessee’s viewpoint, this limitation may increase the benefits of leasing and claiming a full deduction for the rental payments. This is as compared to a leveraged purchase of the same equipment and not being able to deduct the interest fully.
Making the Equipment Financing Decisions
The changes made under TCJA seem to be spurring new investment. Many experts feel that the tax changes will have an overall positive effect on equipment financing. Below are benefits of replacing old equipment or acquiring new technology under TCJA.
A lowered rate for Corporate income tax to 21%
Bonus depreciation percentage of up to 100%
Bonus depreciation allowed for secondhand equipment
Consult Your Tax Advisor
Any change in tax law requires you to meet with a tax advisor familiar with your business. This will help you learn how TCJA will specifically affect your business operations. Financial experts with vast experience in tax law are also a good option. At Mount Bonnell Advisors, we can offer guidance on how to leverage the recent changes to the tax law. We will also provide a full analysis of the tax implications of investing in equipment, especially under TCJA.
Assess Your Options with an Expert in Financing
After speaking with your tax advisor, it would be best to contact a business-lending expert. Here, discuss the most suitable and available financing options to supplement your tax goals. With a diverse range of product options available in the market, you can get a customized equipment lease or financing solution.
The buys or lease decisions regarding the acquisition of equipment may have major implications for a business’ financial performance. In addition to tax considerations, it would be prudent to discuss asset or liability management and maintaining favorable EBITDA with your lending expert. Furthermore, the experts can help you in reviewing options to improve cash flow, working capital, and balance sheet presentations.
If you would like to get more information about equipment financing, do not hesitate to get in touch with us. Our experts will also be happy to help you make the buy or lease decision based on well-founded financial facts.
