As the Tax Cuts and Jobs Act of 2018 (TCJA) has brought about many changes, the tried-and-true benefits of leasing equipment remain unchanged, according to a new article by Toni Larson, senior vice president of industrial equipment for Key Equipment Finance, in MetalForming Magazine.
Equipment financing continues to provide: enhanced cash flow, unparalleled flexibility, and preservation of credit lines, Larson says. While the benefits of equipment financing continue, it’s important to consider how tax reform is changing the playing field.
The good news
Most equipment offers depreciation benefits. Historically, the most common financing options – loans, nontax leases, and tax leases – allowed equipment owners to deduct equipment-depreciation expenses from taxable income. This significantly lowered tax liabilities. Fortunately, the TCJA does not eliminate this benefit, but it is extremely important to select the option that optimizes your business’ tax strategy.
The key to the TCJA is to understand that the range and size of available corporate-tax deductions has expanded. The TCJA has cut the maximum corporate tax rate from 35 to 21 percent, dramatically reducing tax liability for many manufacturers.
Things to consider
To determine the tax deductions and credits that will best benefit your business will take time, but it will be time well spent. Make sure to consider the following:
100% 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 can expense 100% of the equipment cost in the first year of ownership.
Note that the temporary increase in expensing allowance now also applies to pre-owned equipment purchases. Additionally, the 100% expensing benefit will begin to phase out in 2023.
- With the changes to the TCJA come limits on deductions related to interest accruals and payments made on debt in a given tax year. This could have a negative effect on heavy borrowers. However, equipment leasing could help to offset this because rental payments from a lease are not included in this calculation.
- Historically, Section 179 allowed businesses with limited capital acquisitions to expense 100% of the cost of new and pre-own equipment in the first year of ownership (up to $500,000 in cost). The TCJA permanently increased the deduction to $1 million beginning in 2018, on an equipment-investment limit of $2.5 million. The tax-reform changes to Section 179 are both permanent and applicable to a broader set of assets, including HVAC/ventilation systems, fire-protection, and security systems.
Moving forward
To develop the most profitable acquisition strategy, consult with an equipment-financing expert. It’s important to seek a professional with a tenured history in leasing structure, as well as an acute understanding of your business goals.
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