The Impact of Tax Reform

What equipment finance companies need to know

The equipment leasing and finance industry faces a new tax landscape following the enactment of H.R. 1 (known as the Tax Cuts and Jobs Act) at the end of 2017. The headline accomplishment of tax reform is decreasing the federal corporate tax rate from 35% to 21%; however, that is a mixed blessing for the leasing industry depending on the term and tax intensity of particular leases.

Tax reform added limitations on interest deductions, which could affect the industry’s ability to rely on existing securitization structures for economical capital funding. In addition, tax deferral using like-kind exchanges is no longer available for equipment. But, the news is not all bad. The ability to expense 100% of the cost of equipment purchases presents other opportunities and tax reform has introduced new motivations for equipment users to lease.

100% Expensing

For the first time, tax reform enacted broad 100% expensing (also known as 100% bonus deprecation) for equipment. The new provision is particularly groundbreaking in that it applies to “used” equipment. The expensing rules have many technical nuances. Here are some of the key ones for equipment leasing:

1. This provision is not permanent and eventually only old-MACRS will be available.
   
   
2. Equipment can be “used” but must be new to you.
   
   
3. No expensing for foreign and tax-exempt lessees—the “Pickle Rule” still applies.
   
   
4. Regulated utilities should lease.
   
   
5. It is the “green light” for sale-leasebacks of new and used equipment.
   
   
6. Watch out for contracts binding on or before Sept. 27, 2017 (i.e., before the effective date of 100% expensing) to acquire equipment.

Leasing in Vogue Again

We expect to see many companies preferring leasing to borrowing as a consequence of the limit on interest deductions; hence an uptick in leasing. The tried and true method of using securitization funding for capital funding may give way to leasing; that is leasing companies opting to use sale-leaseback structures to fund their portfolios. Further, a sale-leaseback could be combined with leverage being provided through equipment trust certificates issued by the lessor in the sale-leaseback in which the leasing company is the lessee (and the equipment users are the sublessees).

Read about each of these, and more details about the impact of tax reform on equipment leasing and finance—including repeal of like-kind exchange for equipment, the 80% annual limitation on NOLs, and other funding structures to mitigate the impact of tax reform, including using a Section 467 Loan—in the full version of this article on the ELFA website at www.elfaonline.org/industry-topics/tax-reform.

The equipment leasing and finance industry has traveled the road of tax changes many times before and that experience positions it well to adapt its business model to allow it to thrive following the enactment of tax reform.