Weigh All Factors in Your Equipment Financing Decision

Should you own or lease your equipment? The new tax reform law means businesses should reconsider several factors, including debt load, need for liquidity, and tax efficiency.

How will the Tax Cuts and Jobs Act affect business financiamiento de equipos?

“Initially it will be a balancing act between 100 percent depreciation and the interest expense disallowance,” says Will Perry, President, Regions Equipment Finance. Before making decisions, Perry says companies will have to consider their income, access to liquidity, current debt load, and whether they’re public or private.

The most relevant tax code changes include the following:

One hundred percent first-year expensing (bonus depreciation) in 2018 and beyond, decreasing 20 percent each year from 2023 until it is eliminated in 2027.

Limit of 30 percent interest expense deductibility on debt based on earnings before interest, impuestos, depreciation, and amortization (EBITDA), or net earnings. This will shift to 30 percent of the more restrictive EBIT in 2022, which doesn’t include depreciation and amortization.

Companies with lower EBITDA and high debt may be affected the most because limits on interest expense deductibility will make loans more expensive. For instance, manufacturing firms with high fixed costs and lower EBITDA may find it more tax efficient to shift ownership to a third-party lessor instead of purchasing equipment outright.

Net operating losses, which are taken when a company’s tax deductions are greater than its taxable income, are restricted to 80 percent of taxable income and can be carried forward indefinitely. Previously, NOLs could be applied 100 percent to the two previous years or carried forward for up to 20 years.

Un equipment finance group can assist companies in monetizing unexpired NOLs via a sale leaseback, resulting in cash to their bottom line. Shifting asset ownership can result in lower lease payments — which in turn preserves cash because the lessor can take 100 percent depreciation on used assets — and tax efficiency as the lease stream is not subject to the interest expense calculation.

Regions Equipment Finance has run dozens of scenarios on the impact of the new tax code. But the bottom line? “It’s ultimately going to boil down to each company’s individual situation and how they measure success,” Perry says.


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