Equipment is one of the most important factors in smooth operation of a pumping business, and the question of how to pay for new equipment is equally important. With uncertainty of how 2017 tax reform will impact equipment acquisition, these business strategies warrant a closer look.

Financing capital equipment can enable pumping businesses to conserve cash and lines of credit while providing maximum flexibility. The need to grow, stay competitive and meet the latest safety standards all factor into decisions when acquiring heavy equipment.

With all of this in mind, now is a good time to determine the best way to pay for capital equipment and maximize the benefits of tax reform legislation for qualifying purchases. This is general information only and is not comprehensive nor is it legal, accounting or tax advice. Consult with your own tax experts for advice on how to handle your individual situation.

ENTER TAX REFORM

The Tax Cuts and Jobs Act, or TCJA, of 2017 positioned some businesses for growth and profitability.

Manufacturers have historically identified successful go-to strategies to optimize equipment-related tax legislation, but the playing field has changed. From 100% expensing to the elimination of corporate alternative minimum tax, recent changes require a fresh analysis. Here are four important considerations:

1. Equipment financing remains an effective acquisition tool.

The TCJA didn’t change the tried-and-true benefits of leasing that have always supported business growth. Equipment financing continues to provide:

• Enhanced cash flow, allowing businesses to avoid large out-of-pocket costs and effectively manage cash from operations.

• Flexibility and asset-management features, including options to keep equipment in place for the long haul or upgrade to the latest technology.

• Preservation of credit lines to support day-to-day business operations rather than long-term capital needs.

2. Continued tax savings.

Most equipment offers depreciation benefits. Historically, the most common equipment financing options — loans, nontax leases and tax leases — allowed the equipment owner to deduct equipment depreciation expenses from taxable income, which significantly lowered their tax liability. Fortunately, the TCJA didn’t eliminate this benefit.

Evaluating and selecting the option that optimizes your unique business tax strategy is essential. Traditional thinking went something like this: Full corporate tax payers benefited most by retaining equipment tax ownership to take depreciation directly. Loans and nontax leases worked best for these businesses. Businesses that weren’t full corporate tax payers commonly found more benefit from shifting the equipment’s tax ownership to a third-party financing source in return for a lower financing rate. In this scenario, tax leases often were appropriate for the business strategy.

3. Historic changes with major impact.

The centerpiece of the TCJA — a reduction in the maximum corporate tax rate from 35% to 21% — dramatically reduced tax liability for many manufacturers. Additionally, the range and size of available corporate tax deductions expanded. The combination of these two changes begs an important question for most businesses: How many deductions can realistically be absorbed going forward?

Determining the tax deductions and credits that benefit your business the most is time well spent. Together, your financial adviser and equipment finance provider can help you determine the right equipment acquisition strategy for your business this year and beyond.

4. How much is too much?

Understanding your company’s ability to absorb large deductions (e.g., modified accelerated cost recovery system depreciation, 100% expensing and other tax benefits) is important. Here are some areas to consider:

100% Expensing

For the better part of the last decade, bonus depreciation has reigned supreme, offering an additional 30% to 50% cost recovery — in addition to standard MACRS depreciation — on new equipment in the year it was placed in service. For equipment placed in service after Sept. 27, 2017, and before Jan. 1, 2023, however, the tax reform bill has eliminated the bonus depreciation feature. Instead, those who invest in qualified equipment during that time can simply expense 100% of the equipment cost in the first year of ownership.

Interest Expense Deduction

The TCJA now places limits on deductions related to interest accruals and payments made on debt in a given tax year. Unfortunately, this can negatively affect heavy borrowers and those investing in business growth and expansion activities. Equipment leasing might help to offset the pain, however, because rental payments arising from a lease are not included in this calculation.

Alternative Minimum Tax

The repeal of the corporate AMT was cause for celebration for many organizations. In the past, those paying AMT seemed to automatically benefit from a tax lease equipment acquisition strategy, as capital asset depreciation was an AMT preference item. This meant that equipment depreciation benefits were effectively neutralized and had little value for AMT payers.

Net Operating Loss Carryforward

Net operating loss carryforward generated in 2018 or later can no longer be carried back (with certain natural disaster exceptions) but can now be carried forward indefinitely. However, NOL will only reduce taxable income by up to 80% a year.

Section 179

Traditionally, Section 179 allowed businesses with limited capital acquisitions to expense 100% of the cost of new and pre-owned equipment in the first year of ownership. Owners could expense up to $500,000 in cost, so long as the business’ total equipment investment for the year did not exceed $2 million. For investments totaling more than $2 million, the deduction declined on a dollar-for-dollar basis.

The TCJA permanently increased the deduction to $1 million beginning in 2018, on an equipment investment limit of $2.5 million. Section 179 has always applied to new and pre-owned equipment purchases — previously a significant distinction from bonus depreciation. However, the new tax reform changes to Section 179 are both permanent and now applicable to a broader set of assets.

WEIGHING THE BENEFITS

Equipment financing can be used as a strategic tool. It allows pumping businesses to not only acquire and employ assets immediately, but also develop a plan to achieve long-term goals. Whether the objective of your business is to enhance cash flow or optimize tax savings — or both — an in-depth analysis of your equipment acquisition strategy is necessary. Assessing your business’ current and future asset needs in the form of a lease versus buy analysis can help determine whether a lease or loan is the best alternative for your company.