On November 5, 2024, Donald Trump was elected President of the United States. Both during his campaigning and upon being elected, he has spoken about his planned changes to the Tax Code. During his first administration, he lowered the corporate tax rate from 35% to 21% and implemented 100% bonus tax depreciation.

During Biden’s administration, the Inflation Reduction Act (IRA) focused on incentivizing alternative energy investments, including electric vehicles, and created the ability to transfer many investment tax credits, creating a whole new market.  

The pendulum swings again the other way as we look at the potential changes to the Tax Code to consider how lessors and lessees should position themselves.

We expect Trump will move fast to make changes to the Tax Code within his first 100 days.

So, let’s take a look into our crystal ball!

Alternative Energy Investments

Given Trump’s distaste for the IRA, consensus is he will attempt to unwind many of the aggressive tax incentives provided under the act. History has told us that one cannot simply change the Tax Code at will and given the time it takes to break ground and build many facilities, any change would have to consider those already commenced projects and establish a phase-down period for those benefits to be unwound. We have also heard that the volume of credits traded (made possible by the IRA) is much greater than anticipated and, as such, likely created much more demand for new projects. 

Given the phase-out timeframes generally required, some industry pundits have indicated that realistic phase downs would likely commence in 2027 to 2029, right at the end of Trump’s term.  

We have heard that one of the easiest credits to unwind would be the Section 45W electric vehicle tax credits. Anecdotally, we have heard that Tesla is not concerned about eliminating the credit because they have the largest and most established fleet of EVs, and their high-speed charging network is superior to any others.

Suggestions

• If one is considering an alternative energy project, we suggest expediting the approval process so you can break ground as soon as possible to grandfather the project. Look to IRS Guidance 2021-41 for the “safe-harbor” factors needed; either the start of physical work or expending 5% of the project cost.
• If considering transferring a tax credit, commence the agreement as soon as possible in the event Trump squashes the ability to transfer. A grandfathered agreement might survive a Tax Code change; having no agreement has no chance of being grandfathered.     
• For vehicle fleet lessees, consider commencing leases whether a car is yet assigned to a driver or not. Rather than give them the luxury of picking their car, provide them with a population of vehicles already acquired. EV credits of $7,500 apiece average about 14% of the typical EV cost, so that reduction in cost would make up for a few months of rent payments even though the vehicle is idle.

Corporate Tax Rate

Trump has suggested lowering the corporate rate to 15%, although he seems to vacillate between whether that is for all taxpayers or only domestic manufacturers. A tax lease goes through a period where a tax loss is generated during the earlier periods of the lease when depreciation exceeds rents, and a tax gain is recognized when there is no tax basis to depreciate and when the asset is disposed of. Accelerated tax depreciation tax benefits are worth more when rates are higher.

Suggestion: Write as many tax leases as possible now while the rate is 21% and consider a low-high rent structure and a three-month rent holiday. In this manner expenses will be front-end loaded while the taxable income, including the gain on the asset disposition, would occur when (if) the rate drops to 15%. In any event, it is always useful to create a sense of urgency with customers, indicating that now is the time to lease because rents will be higher if the tax rate drops.     

TCJA Phase Downs

Bonus accelerated tax depreciation is currently 60%, moving down to 20% a year until phased out. We think Trump believes 100% bonus depreciation is a good incentive to invest in capital assets. Experience has shown that with respect to bonus depreciation, when implemented, it is often provided retroactively so that companies don’t hold off on investing, waiting for larger future bonus depreciation.

Suggestion: Consider offering lessees an incentive for acquiring assets now, perhaps by offering to adjust the pricing if a larger bonus depreciation is provided retroactively to the acquisition date. In this manner you would show that you are willing to share in any unplanned benefit that may arise.   

Section 163j –  Interest Expense Limitation

Section 163j limits interest expense deductibility and was unpopular on a bipartisan basis. While not on Trump’s radar currently, we think it may show up.

Suggestion: Consider using a tax lease-in strategy to avoid incurring additional interest expense until this section is addressed.   

Conclusion

Uncertainty is the “bane” of business. Without the ability to plan, businesses could simply pause, always waiting for a definitive environment. We suggest lessors be proactive. Eliminate the uncertainty by making measured decisions and/or acknowledge the uncertainty but share potential upsides with your customers; they will appreciate it!