Business / Corporate Financing

EQUIPMENT AND SOFTWARE FINANCING

Equipment acquisition and tax strategies

Comparing your options

Explore our outline of important factors to consider when investing in new equipment – including possible tax changes that might impact your business.
Explore below

New equipment can help you grow and stay competitive

In the midst of tax-reform uncertainty and ever-greater capital concerns, business growth poses a dilemma. There are many factors to consider when acquiring new equipment; and a customized structure can help you achieve your goals. For example, if your goal is lower monthly payments to improve cash flow and free up capital for other investments, consider a tax lease.

Take a look:

Loan

Tax Lease

*Loan assumes a 4.39% interest rate, tax lease assumes a 20% purchase option structure.


Tax considerations

In today’s environment, full taxpayers in need of the sheltering effect of equipment depreciation will often benefit from tax ownership of equipment. This can be accomplished with a loan, installment payment agreement and some leases.

Today, all of these options allow the user to deduct depreciation and interest charges from taxable income.

However, recent tax reform proposals contain provisions for a significantly lower tax rate and may disallow interest deductions. 

If included in the future corporate tax landscape, these changes could create a significant shift for corporations. Many could find that the lowest after-tax cost to acquire equipment results from a tax lease structure. Here are two reasons why:

Tax leases effectively trade tax depreciation for lower payments.

Tax leases allow the entire lease payment to be deducted as an operating expense on the business’s tax return.

Here are some additional tax considerations to factor in when you evaluate your options for equipment acquisition.

Alternative Minimum Tax (AMT)

AMT

Corporations near to or already paying Alternative Minimum Taxes should be aware of the implications of purchasing their assets. Such organizations may not be able to effectively use all the tax benefits associated with accelerated equipment depreciation. Consequently, they can experience an increase in the after-tax cost of acquiring an asset.

Tax lease

A tax lease can minimize the creation of additional tax depreciation: The lessor records the equipment ownership and resulting depreciation. And because equipment leasing companies are able to more efficiently utilize the tax benefits associated with depreciation, the lessee can enjoy the savings in the form of lower monthly payments made to the lessor.

Net Operating Losses / tax credits1

NOL/tax credits

For corporations with expiring Net Operating Loss (NOL) carryforwards or other similar tax credits, depreciation deductions on purchased equipment reduce taxable income, sometimes preventing a business from fully using its tax credits.

Tax lease

Tax leasing may allow you to maximize the use of the credits to lower your tax liability. In this manner, tax benefits are passed on to the customer in the form of lower payments.

Mid-quarter convention

Mid-quarter convention

The mid-quarter convention states that if a company acquires more than 40% of its capital assets during the fourth quarter, it must recalculate its depreciation expense using the mid-quarter convention tables. Most companies attempt to avoid the mid-quarter convention by closely managing the amount of assets they purchase (and place in service) during the fourth quarter.

Tax lease

Tax leasing allows your company the freedom to acquire the equipment it needs, when it’s needed. By assigning the ownership role to the lessor, you can:

  • Avoid restrictions on fourth-quarter asset acquisition
  • Still receive the full MACRS tax advantage (via lower monthly payments)
  • Handle unexpected project delays or fourth-quarter replacement needs

Weighing the benefits

Equipment financing can be used as a strategic tool: It lets you acquire and employ equipment immediately and develop a plan to achieve long-term goals. Here are three benefits to your business.

Credit preservation

Financing allows your organization to stay nimble and productive – you can acquire the equipment you need immediately and let your assets generate revenue while you pay for them.

Cash flow

Flexible financing often involves little or no money down while providing options for seasonal requirements, and bundling software, delivery and training costs into your monthly payment plan

Technology and equipment management

Financing offers mid-term upgrades that enable you to enjoy current technology while avoiding the risk of owning obsolete assets. Plus, it can include options to renew the lease, purchase or return your assets at the end of the term.

Summary

Take a strategic approach

Regardless of what tax changes Congress may propose, you can develop a profitable acquisition strategy with the help of an equipment financing expert. Seek a qualified professional with proven experience in lease structuring, broad industry knowledge and—most importantly—an interest in and understanding of your unique business goals.

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Learn More About Equipment Financing

Visit 
keyequipmentfinance.com/business
 or contact your KeyBank Sales Representative.