President Trump signed the new tax legislation into law at the end of 2017. Both individuals and small business owners start 2018 with sweeping changes to the tax code, the likes of which haven’t been seen for thirty years. President Trump called the passing of the Tax Cuts and Jobs Act a “Christmas Gift” for hard working Americans, but other sources differ on the tax benefits. Small businesses are estimated to be 70% of the U.S. economy, therefore, a boost to small business can translate into a boost for the economy-at-large.
After analyzing the Tax Cuts and Jobs Act, here are our key findings that business owners need to know when addressing their equipment financing needs going forward.
FEDERAL CORPORATE TAX CUTS
One of the biggest changes to the tax code is a new overall corporate tax rate, now 21% instead of 35%; and the repeal of the corporate alternative minimum tax (AMT). Many business owners can find relief in the appealing 40% reduction to the corporate tax rate, and can potentially use the additional savings for capital investments or profitability. Additionally, it is argued that the new rate can create a more favorable business environment in the United States, attracting businesses from different countries in search of a tax haven.
The new tax rate eases your tax burden, presenting room for your business’ growth. But, when it comes to equipment financing, decision-making has many moving pieces beyond the hardline tax rate. This includes usage models, acquisition analysis, and business processes. So, how does this affect equipment leasing and equipment finance directly?
The new legislation added Sec. 168(k) for business depreciation. Now businesses can deduct 100% of the cost of equipment the year it is purchased and used, up to the year 2022. Thereafter, depreciation is reduced over four years: 80% will be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Analysts also say that these time frames can be extended by 1 year on certain equipment or property with long production periods.
This improvement to equipment deductibility can be a big boost to business owners when purchasing new property. Knowing that you can deduct the purchase of new equipment can depressurize your acquisition process, and can boost your savings on equipment in the same year it was acquired. Now, the heavy pieces of equipment can produce savings on top of inventory.
In the near term, the new tax law can spur additional growth in new equipment leasing and equipment purchases on a broad scale. The potential benefit from bonus appreciation can conserve your cash, and maximize space in your lines of credit for future purchases.
What’s very important for business owners is efficiency, ensuring that employees, equipment, and technology, all work together to improve productivity. The tax bill presents an upgrade to how small business can wisely address equipment depreciation during tax season.
CHANGES IN INTEREST DEDUCTIBILITY
The bill also affects business and equipment financing with respect to equipment financing debt. Previously, interest on debt was classified as a business expense. Starting in 2018, you can only deduct interest expenses of up to 30% of its EBITDA (earnings before interest, taxes, depreciation, and amortization). Any amount in interest expense beyond 30% will no longer be deductible.
Savings will be limited further after 5 years. In 2022, the deductibility of corporate debt will be capped at 30% of earnings before interest and taxes, but after depreciation and amortization expenses, which is a much smaller amount than EBITDA. The 30% cap on top this new figure, reduces the tax savings even further. This change can significantly alter leverage decisions for business owners, especially for highly levered companies. Business owners should keep this in mind going forward.
PRIORITIZE PRODUCTIVITY AND EFFICIENCY
Many will debate the efficacy of the new tax legislation. But the key takeaway is to remain prudent in your business processes, and thoughtful about your decisions to buy, or lease your equipment. Efficiency and productivity improvement must be among your highest priorities—in any tax environment. Though the tax bill may present certain limitations, it does present a step in the right direction for small business.
As always, Liberty Commercial is here to solve your equipment finance, leasing and vendor financing needs. With a full arsenal of financing services, Liberty Commercial makes life cycle asset management and structured financing easy.
ABOUT LIBERTY COMMERCIAL
Liberty Commercial Finance provides highly competitive equipment financing and superior customer service for even the most challenging, complex organizations. Leveraging decades of deep transactional expertise and backed by a leading global investment management firm with over $15Bn under management today, Liberty has the capital, capacity and commitment to finance the equipment that fuels the American Dream and beyond.
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