New US Tax reform: impact on equipment and automotive leasing companies
Author Agneta Venckute
December 18, 2017 marked an important date in US market history as the biggest tax reform in the last three decades was signed. The government has kept its promise: corporate tax was lowered from 35% to 21%. How will the US economy and local businesses be affected?
How will the new tax reform influence the US economy?
The US Congress tax committee estimates that the reduced tax rate will raise the US budget deficit to 1.5 trillion dollars, although with the increasing growth in the economy, this number will lower to approximately 1 trillion dollars. Experts say that these changes will without doubt affect the global economy as well. While the US administration believes that the reform will increase GDP (0.7% a year to reach 2.9% by 2027), this is equal to 1.8 trillion dollars additional income in the US. As 80% of US-based manufacturing and services companies acquire the equipment they need using leasing or leasing services (Source: ELFA), the leasing industry will be affected as well. How exactly?
How will the tax reform effect equipment leasing companies?
The new tax reform offers one more massive benefit to companies: it allows businesses to immediately fund their new asset purchases, with 100% spending deductions from the investments made to the new assets for the upcoming five years. The amount of asset value that can be spent in this manner has doubled from $500,000 to $1 million, and the limit on the amount spent on equipment purchasing is now $2.5 million. The reform is valid also for the past: the 100% spending rule is applicable to any equipment purchase made after September 27, 2017.
The Monthly Confidence Index for the Equipment Finance Industry and other numerous measures of business confidence presume a high probability of increased equipment spending. Small and medium-sized companies have a great opportunity to improve their business efficiency by updating their existing equipment. In short, the new tax system will cause positive changes for leasing companies: more clientele to finance leasing companies and more disposable money to operate leasing companies.
Perhaps it’s the right time to call your prospects who said they were not in a position to acquire anything last year?
More passengers for automotive leasing companies?
The same goes for automotive leasing companies. Businesses that lease passenger cars can expect greater sales, as the new tax reform has made very favourable conditions for business owners to acquire vehicles. The depreciation deductions for such types of cars (new or used) acquired after September 27, 2017, which are used for business purposes at least 50% of time, are going to have the maximum annual deductions as per TCJA. That is:
First year: $10,000 (previously: $11,160 new car, $3,160 used car);
Second year: $16,000 (previously: $5,100);
Third year: $9,600 (previously: $3,050);
Fourth year: $5,760 (previously: $1,875 thereafter. The limits for light trucks and vans were slightly higher).
There is a change here: in the past, the bonus depreciation was applicable only to purchases of new equipment. Now, the acquired equipment can either be new or used (it is new to your company anyway).
In addition to the tax reform changes, one more heavy decision was made on March 1 – the increase in tariffs on steel and aluminium imports, which will undoubtedly increase the net price of cars and trucks that are built in the USA. Basically, the benefits that US-based manufacturers have received from the tax cut will be counteracted by the increased steel and aluminium tariffs. Experts believe this will increase the selling price.