Commercial

How the 2018 Tax Plan Affects Equipment Financing

Dec 21, 2018

Business investment overall has been growing along with the American economy, and investments in various types of equipment are expected to keep pace. According to the 2018 U.S. economic outlook report from the U.S. Equipment Leasing & Finance Foundation, investment in equipment and software is projected to expand 9.1 percent in 2018, almost double the rate of 5.2 percent in the prior year.

Tax Cuts and Jobs Act (TCJA)

The investment in equipment is expected to be fueled by the changes to the Internal Revenue Code under the Tax Cuts and Jobs Act (TCJA), which was passed at the end of 2017.

There are four provisions of TCJA that are expected to have an impact:

Reduction in tax rates
Extension and expansion of bonus depreciation
Like-kind exchanges elimination
Limitations on interest deductions

Reduction in Tax Rates

Effective January 1, 2018, TCJA lowered the corporate income tax rate to 21 percent. This flat rate replaces the prior graduated rates that started at 15 percent for taxable income of $50,000 and increased to a minimum of 34 percent for income of $75,000 and above. This flat rate represents a tax cut for companies of nearly all sizes.

Extension and Expansion of Bonus Depreciation

Under TCJA, the bonus depreciation percentage was increased to 100 percent, and companies can now write off the full amount of qualifying purchases in the same year of acquisition.

In addition, the bonus depreciation deduction was further expanded to allow used qualifying property, not just new.

With a few exceptions, the inclusion of used qualifying property is applicable to property acquired and placed in service after September 27, 2017, and before January 1, 2023. After that period, the deduction decreases by 20 percent per year and is phased out entirely after 2026.

Like-Kind Exchanges Elimination

Like-kind exchange treatment was eliminated for all property except real property under TCJA. However, this change may not always result in an adverse tax consequence. For example, a business may be able to offset the gain from a taxable sale of equipment with the 100-percent bonus depreciation deduction for the replacement property.

Limitations on Interest Deductions

TCJA also put limitations on interest deductions, which generally can't exceed 30 percent of taxable income. This limitation only applies to businesses with average annual gross receipts in excess of $25 million. From a lessee's perspective, this limitation may increase the advantage of leasing and claiming a full deduction for the rental payments versus a leveraged purchase of the same equipment and not being able to deduct the interest fully.

Equipment Financing Decisions

The changes made under TCJA seem to be designed to spur new investment, and many industry experts feel the tax changes will have an overall positive effect on equipment financing.

A business considering the replacement of old equipment or acquisition of new technology may be able to benefit from three key changes under TCJA:

Corporate income tax rate lowered to 21%
Bonus depreciation percentage increased to 100%
Bonus depreciation allowed for used equipment

Consult Your Tax Advisor

As with any change to tax law, you will want to meet with a tax advisor familiar with your business to learn how TCJA will specifically affect your operation. As a financial expert with training in tax law, they are in the best position to offer guidance on how you can fully leverage the recent changes to the tax law. They may also be able to provide a full analysis of the tax implications of investing in equipment, especially under TCJA, with options to consider for the coming year.

Review Your Options with an Expert in Financing

After speaking with your tax advisor, contact a business lending expert to discuss the available financing options to complement your tax goals. With a diverse range of product options available today, an equipment lease or financing solution can be structured to fit your specific needs.

Decisions regarding the acquisition of equipment — and whether to buy or lease — can have major implications for a business' financial performance. In addition to tax considerations, your lending expert can discuss asset/liability management and maintaining favorable EBITDA, plus review options to improve cash flow, working capital, and balance sheet presentations.

For more information on Axos Bank and our Equipment Financing Programs that offer a wide range of equipment financing options and the security of working with a nationally trusted bank, please contact us by phone at 1-888-254-1750 today.