WHILE THE FAMOUS QUOTATION SAYS THAT TAXES ARE ONE OF LIFE’S TWO CERTAINTIES, tax reform was never certain until it was. On Dec. 22, 2017, President Trump signed H.R.1, a law that makes the most sweeping tax code changes in decades. One thing is clear: the new law does not impact our entire industry in the same manner. The effects of these changes will depend on everything from your corporate structure to whether your business is predominantly leasing or financing to the industries of your customers. Here are some of the highlights.
Corporate Tax Rate
The new law provides for a 21% corporate rate. This has implications for not only income, but also the value of deductions as well as lease-versus-own types of analyses.
The Act provides for 100% expensing of both used and new equipment in the first year, and this is applicable for equipment first placed into service after Sept. 27, 2017.
This provision is scheduled to remain in place through 2022. Afterward, the provision gradually phases down with regular depreciation schedules coming back into effect in 2027 for most equipment types. There is widespread speculation this provision would become an annual exercise in extension starting in 2022, but 2022 is a long way off, especially in Washington years.
Under the new tax code, businesses will have their ability to deduct their net business interest limited. Generally speaking, the interest eligible to be deducted is limited to:
interest income +
floor plan financing interest paid +
30% of adjusted taxable income
For the next four years, adjusted taxable income closely approximates tax EBITDA, and after that it would be based on tax EBIT. This limitation applies to both corporations and pass-through businesses with the pass-through rules demanding special attention. Lastly, there are exemptions and exclusions in this area that should be thoroughly reviewed.
The new law would require an accrual method taxpayer subject to the all events test for an item of gross income to recognize such income no later than the taxable year in which such income is recognized as revenue in an applicable financial statement. This provision is complex and there are differences of opinion as to its effect.
Like-kind exchanges for personal property are repealed under the new law.
The Act increases the maximum amount a taxpayer may expense under section 179 to $1,000,000, and increases the phase-out threshold amount to $2,500,000. This provision is effective for equipment placed into service in tax years beginning after Dec. 31, 2017.
This is one of the most complex areas of the new tax code, but in general, certain types of pass-through businesses are eligible for a 20% deduction of pass-through business income. This deduction is available for specified service business owners, a term of the law, which includes financial services, with income under $157,500 (twice that for married filing jointly). If you are a pass-through entity, you will want to talk to your tax advisors about how these provisions will impact your business sooner rather than later. The top individual rate was reduced to 37%, which should provide some relief even once the 20% deduction phases out.
Request for Input
This law is a sea change for how income is taxed in the United States. ELFA is going to endeavor in the coming months to put out as much information as possible on the impacts of the various provisions on different sectors of our industry. If there is a specific issue that you would like for ELFA to focus on, please let us know.
Given the speed at which this bill moved, it is anticipated there will be significant technical corrections needed in the near future. ELFA will be interested in hearing from our members what corrections are needed.
Listen to a recording of ELFA’s Jan. 23 web seminar on the new tax reform bill at https://www.elfaonline.org/taxreformwebinar.