TAX REFORM + LEASING GUIDE What you need to know about the new tax law and how it impacts capital financing First American Equipment Finance FAEF.com/TaxReform
THE NEW TAX LAW The U.S. is experiencing its first tax overhaul in more than 30 years. H.R.1, also known as the Tax Cuts and Jobs Act of 2017 (TCJA), was signed on December 22, 2017. The act changes many provisions of the Internal Revenue Code (IRC). Most provisions of TCJA became effective on January 1, 2018. You can review the full law here: waysandmeans.house.gov/taxreform
Did you know? Eight out of 10 companies lease or finance their equipment. OPPORTUNITY AHEAD TCJA will positively impact many industries, promoting business expansions, new investments and more capital expenditures. THE NEW TAX LAW In fact, this year, U.S. businesses are expected to make their largest capital investments since 2012. In this guide, we ll explore key provisions of the new law, implications it will have on business and how to find opportunity among it all.
CORPORATE TAX RATE What changed? The corporate income tax rate is now a flat 21% for C-corporations. Previously, the tax rate had ranged from 15-39%. Pass-through entities (S-corporations, LLCs, LPs) are now eligible for a 20% deduction on taxable profits, directly passed through to the owner.
MORE AFTER-TAX PROFITS What does this mean for you? A reduced tax rate increases net income and cash flow for most corporations, opening the door for equipment rentals, IT refreshes and office expansions. Turn your after-tax profits into a business advantage. In today s rapidly evolving business environment, the only way to stay on the cutting edge is by acquiring new equipment and technologies. Commonly Leased Equpiment CORPORATE TAX RATE PRODUCTION AND DISTRIBUTION Production and assembly, forklifts, robotics, laboratory and sanitary equipment, railcars, trucks, trailers TECHNOLOGY AND SOFTWARE Desktops, laptops, monitors, tablets, software, servers, networking, infrastructure, telecommunications FACILITY UPGRADES Furniture and fixtures, HVAC, boilers and chillers, generators, build-out, solar systems
INTEREST DEDUCTIBILITY CAP What changed? The new tax law limits how much interest expense can be deducted in a single year for businesses with annual revenue greater than $25MM. The limit equates to 30% of adjusted taxable income (EBITDA) per year, effective through 2021. After 2021, the limit will be based on tax EBIT. This limitation applies to both corporations and pass-through businesses. When businesses pay interest on loans, the interest is treated as an expense and it reduces taxable income for the year. Prior to 2018, there were very few limitations on how much interest could be deducted in a single year.
LEASING OVER LOANS What does this mean for you? This provision favors leasing over loans. Businesses that normally use loans for financing will be more limited in deducting their interest payments. This will lead to a higher taxable income and therefore more taxes owed. But it s not all bad news Convert to tax leases. Consider using a tax lease structure over a loan for future financing needs. This structure allows businesses to deduct 100% of the lease payments as operating expense and not record any interest expense on taxes. Tax leases offer low, fixed monthly payments and greater flexibility than loans. Tax lease structures include Fair Market Value leases (FMV) and Fixed Fair Market Value leases. Fixed FMV leases have a predetermined buyout price. Purchase for FMV or Fixed FMV INTEREST DEDUCTIBILITY CAP Base Term (Typically 3-5 yrs) Return Equipment Continue to Rent
INCOME TAX INDEMNIFICATION What changed? Lessors may begin executing their tax indemnification clauses. Banks, vendors and leasing companies often use the income tax benefits associated with products like FMV leases and Fixed FMV leases to subsidize their tax lease pricing. To account for changes in Federal tax rates, many lessors include provisions in their contracts that allow for adjustments to the client s rate, mid lease term.
WORK WITH SIMPLE TERMS What does this mean for you? The reduction in corporate income tax rate may cause other lessors to increase the rates on existing tax leases in the middle of lease term to make up for their loss. Not all contracts are created equal. First American s master lease does not contain income tax indemnification provisions, so your business is protected against Federal tax rate changes. You deserve straightforward equipment leasing solutions--not hassles. That s why our Master Lease is just 4 pages. Our simple terms: + No blanket liens + No covenants + No application fees + No documentation fees + No UCC filing fees + No origination fees + No restocking fees + No multiple location fees + No legal fees + No credit underwriting fees INCOME TAX INDEMNIFICATION
BONUS DEPRECIATION What changed? Businesses can now realize 100% of depreciation in the year they acquire an asset. Previously, businesses were only able to expense the depreciation spread over several years, at just a percentage of the total cost of the asset. This provision will remain in place through 2022. Afterward, the provision will gradually phase down with regular depreciation schedules coming back into effect in 2027 for most equipment.
LEASING OVER CASH What does this mean for you? This new provision offers businesses immediate relief from their equipment and property acquisitions on their balance sheet, lowering your taxable net income. Consider capital leases over cash. When you re ready to invest in your next piece of equipment, consider capital leases, like the $1 Buyout lease, over paying cash. Depreciate it immediately, all while paying fixed, monthly payments. These leases are treated as finance leases by the IRS and allow you to retain the tax benefits (depreciation) of ownership without the upfront cash outlay. A $1 Buyout lease provides clients predictable payments, access to project management, equipment trade-in options and online lease management services. BONUS DEPRECIATION $1 Buyout lease: Purchase equipment at lease-end for $1 Base Term (Typically 3-5 yrs) Equipment Ownership
...FOR INNOVATIVE ORGANIZATIONS INNOVATIVE EQUIPMENT FINANCING Who we are First American Equipment Finance is a wholly owned subsidiary of City National Bank and part of the Royal Bank of Canada. We re ranked among the largest equipment finance companies in the U.S., and provide capital financing to sophisticated commercial borrowers across the country. Why we re different + Flexible Lease Options Customized payments including tax leases, capital leases, lease lines and step up/down payments + Personalized Service Work with a small team of dedicated specialists, focused on your industry + High Tech For your conveinence, we offer e-signatures, virtual meetings and an online lease management portal + Financial Strength As a bank-owned lessor, we can offer competitive, direct lender rates + Complex Projects Your Project Manager will manage staggered deliveries, multiple vendors and milestone payments + Simple Terms No fees, no blanket liens, no covenants and a 4-page Master Lease
Exceeded our expectations in professionalism, knowledge and customer service. - Tony Pedraza, Controller Quorum Review, Inc. ABOUT FAEF
MANUFACTURERS, SOFTWARE DEVELOPERS, LABS, Generators HVAC Manufacturing Execution Systems Production Equipment Flooring
SERVICE COMPANIES + EVERYTHING IN BETWEEN Software + Licensing Expansions + Leasehold Improvements Lighting Consulting + Professional Services LEASING WITH FAEF Office Furniture IT Hardware
We re here as a resource for you as you evaluate the implications that Tax Reform has on your business. Learn more at FAEF.com/TaxReform This document has been prepared for informational purposes only. First American does not provide tax, legal or accounting advice. Copyright 2018 First American Equipment Finance