How The New Tax Law Affects Equipment Acquisition Decisions

When it went into effect on January 1, 2018, the Tax Cuts and Jobs Act of 2017 made the most significant changes to business tax law in more than three decades. 

While there are wide-ranging ramifications of these changes across all businesses, including permanently reducing the corporate tax rate from 35% to 21%, there are several aspects of the new code that specifically impact capital equipment acquisition and finance transactions.

It is important that all companies that are considering acquiring capital assets fully understand the impact of the new tax code so that they can make the right decisions and take full advantage of all the deductions available.

Which deductions is your business eligible for?»

Here are five equipment related areas affected by the law and how they may impact your company.

1. Bonus Depreciation

Under the new tax law, companies can now write off, as an expense, the full cost of capital assets in the year in which they are acquired. This applies to both new and used equipment.

This write off, known as “Bonus Depreciation", is a significant advantage for companies over the prior tax law, which required companies to depreciate capital assets using the modified accelerated cost recovery system (“MACRS").

Whether a company acquires equipment through a lease or loan, Bonus Depreciation should help make the transaction more affordable.

It is important to note that the reduction in Federal Corporate Tax Rate, from 35% to 21%, reduces the impact of all tax benefits. 

How will the tax rate affect you?»

While Bonus Depreciation will have an impact on a company's tax position, it is somewhat offset by the reduced tax rate.

The Bonus Depreciation amount phases out for most equipment by 20% per year each year beginning in 2023. Farming businesses that previously had a seven-year recovery period for depreciation will see that drop to five years for qualifying equipment placed in service after December 31, 2017[1].

2. Interest Deductions

The new tax law places limitations on the amount of interest companies can deduct. If a company has annual revenue over $25 million, it may only deduct qualifying interest expenses up to 30% of “Adjusted Taxable Income". “Adjusted Taxable Income" is defined as taxable income, less depreciation, amortization, interest expense and interest income [2].

If a company finds itself in a situation where interest deductions are limited, leasing becomes a significantly more appealing way to acquire equipment, since the entire lease payment is tax deductible and not subject to this limitation.

3. Section 179

Under Section 179 of the tax code, companies that purchase qualifying equipment and put it into service can deduct the cost of the equipment immediately within certain thresholds.

Traditionally, companies with up to $2 million in equipment investment could write off up to $500,000 in those purchases. After that, the deduction declined by one dollar for every purchase dollar that exceeded the total investment allowance.

The tax law changed the purchase threshold, bumping up the investment threshold to $2.5 million before the phase-out begins, and allowing companies to deduct up to $1 million of purchases up to that threshold if they have the taxable income to do so [2].

The advent of Bonus Depreciation available to all companies for new and used equipment (noted above) reduces the relevance of Section 179, since there is no longer a restriction on company size in order to fully expense an equipment acquisition in the year acquired.

4. Vehicle and Fleet Acquisition

Recently published IRS guidance clarified depreciation limits for passenger vehicles.

Companies that put vehicles in service in 2018 and don't claim bonus depreciation, may deduct up to:

  • $10,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

If a taxpayer claims 100% bonus depreciation, the greatest allowable depreciation deduction is:

  • $18,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period [2].

5. Leasing and Financing Decisions

Much of the industry is still wading through the changes and determining what it means for customers and equipment leasing and finance providers.

“Tax reform dramatically changed the landscape for the equipment leasing and finance industry. Equipment finance companies are in the process of determining the full scope of these changes, but 100% expensing (bonus depreciation) for five years, a lowering of the corporate tax rate, and a new limitation on the ability to deduct business interest all impact the industry in one way or another," says Ralph Petta, Equipment Leasing and Finance Association (ELFA) president and CEO.

The new tax law holds potential benefits for companies, but also requires careful examination. Decisions about leasing versus other forms of financing equipment now demands more thorough examination of multiple factors, such as taxable income levels, total interest expense, deduction thresholds, among others.

In addition, state tax laws may differ from the federal law, which may add another layer of complexity.

As the IRS guidance continues to release guidance regarding the new tax law, it is critical for companies to work with a skilled tax professional to ensure they're making the best decisions for their situations [3].

Learn more about PNC Equipment Finance’s capabilities by visiting pnc.com/ef.


Will The New Tax Law Impact Your Equipment Investments?

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Tax reform dramatically changed the landscape for the equipment leasing and finance industry. Equipment finance companies are in the process of determining the full scope of these changes, but 100% expensing (bonus depreciation) for five years, a lowering of the corporate tax rate, and a new limitation on the ability to deduct business interest all impact the industry in one way or another.

Ralph Petta, ELFA president and CEO

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Important Legal Disclosures & Information

This article was prepared for general information purposes only and is not intended as legal, tax or accounting advice or as a recommendation to engage in any specific transaction, including with respect to any securities of PNC, and does not purport to be comprehensive. Under no circumstances should any information contained in this article be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Neither PNC Bank nor any other subsidiary of The PNC Financial Services Group, Inc. will be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission. The opinions expressed in this article are not necessarily the opinions of PNC Bank or any of its affiliates, directors, officers or employees.

[1] https://www.elfaonline.org/

[2] Initial Guidance Under Section 163(j) as Applicable to Taxable Years Beginning After December 31, 2017, https://www.irs.gov/pub/irs-drop/n-18-28.pdf

[3] IRS.gov, New Rules and Limitations for Depreciation and Expensing Under the Tax https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act