When businesses need to acquire equipment without a major cash outlay, leasing—also known as equipment financing—is often their preferred solution.

“Equipment finance is a powerful tool for companies looking to diversify their capital structure, improve their cash flows, and have flexible payment options,” says Joseph Sarnicki, pricing leader for PNC Equipment Finance.

To make smart decisions about equipment financing, business leaders can start by understanding how changing tax incentives and economic uncertainty could impact their industry sector. After gaining a handle on how to balance tax, regulatory, and general economic factors, they can begin to develop an effective equipment financing strategy.

Define priorities

The first step is to define business priorities to understand whether financing your capital expenditures through leasing is indeed the right move. Businesses choose to lease equipment for many reasons including preservation of cash flow, capital conservation, tax advantages, 100% financing, and operational flexibility. This often varies by industry. For example, companies with frequent equipment turnover—such as high-tech firms or fleet operators—may prefer leases to owning equipment outright in order to avoid the administrative burden and hedge against obsolescence.

After deciding on a lease, it's time to choose the right lease structure. The structure should include optimizing tax advantages, lower cashflow payments, and deciding equipment ownership. The optimal structure captures the interplay of all of these factors.

Understanding options

Three of the most common structures for equipment financing and their relevant implications are:

  • Fair Market Value (FMV) Lease: The bank retains the tax benefits and passes the savings to the lessee through lower payments.
  • Synthetic Lease: Enables businesses to benefit from lower payments, while guaranteeing the residual value of the equipment.
  • Conditional Sales Agreement: The lessee can claim the tax benefits, but also assumes the depreciation responsibility.

Navigate economic uncertainty

While current interest rates are higher than post-pandemic lows, they have remained at a historically moderate level. But external factors, such as inflation and trade policy, have created some volatility this year.

“Uncertainty surrounding tariffs on steel and aluminum, in particular, is influencing equipment financing decisions,” Sarnicki says. “Some companies are accelerating leases and purchases ahead of potential cost increases, while others are adopting a wait-and-see approach.” Despite some economic headwinds, Sarnicki noted that equipment leasing demand has been increasing in the transportation, high tech, and medical equipment sectors. Nevertheless, in the short-term, higher tariffs could reduce volume, particularly among price sensitive transportation companies.

Tax laws — and how they may change

Over the past seven years, U.S. businesses leasing equipment have enjoyed generous tax breaks – including full expensing and bonus depreciation – thanks to the Tax Cuts and Jobs Act (TCJA) of 20171 . But, unless Congress intervenes, those tax advantages are on track to sunset by 2027. For instance, the bonus depreciation benefit, which initially allowed companies to write off 100% of eligible purchases, will drop to 40% in 2025 and 20% in 2026 – before disappearing entirely.

But, particularly for smaller companies, Section 179 remains a useful tool for expensing equipment purchases. It allows for full expensing of certain equipment purchases. It allows for full expensing of certain equipment purchases up to deduction limit of $1,250,000 with phase out over $3,130,000 for 2025.

Smart financing decisions

Companies that are financing equipment in today’s market should carefully evaluate the tax implications of their lease structure. Strategies for making informed decisions can include:

  • Working closely with lenders - It’s important to work with a lender that can help choose the right financing solution for a particular business. “At PNC, we have dedicated teams to help ensure smooth transitions,” Sarnicki says. “We also offer flexible lease structures that meet the business's tax, accounting, and cash flow needs while simplifying the acquisition process."
  • Fixing Financing in Advance - According to Sarnicki, companies with equipment that is ordered with delayed shipment into the future, should consider securing or locking in their financing terms and payments in advance in order to reduce their economic risk and maintain their budget costs.
  • Early buyout options (EBO) also provide flexibility - for meeting longterm equipment needs. If residual values increase, businesses can purchase the equipment at a pre-agreed price. But if values drop, the leased assets can be returned. Businesses can also refinance the residual by extending the lease.

Other considerations

Unlike loans, leases typically don't require bank financial covenants, and no additional collateral is required—so leasing keeps bank lines readily available.

As businesses navigate tax law changes, regulatory uncertainty, and economic fluctuations, equipment financing remains a critical strategy for managing growth. There are also many accounting benefits, especially with FMV leases, which can specifically reduce the lessee's assets on their books and improve financial ratios.

With the right approach – leveraging tax advantages, securing flexible lease structures, and mitigating risks – companies can reduce costs and optimize cash flow. Contact a PNC Equipment Finance Specialist at pnc.com/ef for your financing needs.

Source

Tax Cuts and Jobs Act: A comparison for businesses