Tax Reform + Leasing

Explore the implications the new tax law has on leasing

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. 

Opportunity ahead.

TCJA will positively impact many industries, promoting business expansions, new investments and more capital expenditures. In fact, this year, U.S. businesses are expected to make their largest capital investments since 2012.

Get the full Tax Reform + Leasing Guide

Key Provisions

Corporate Tax Rate Reduced

The corporate tax rate is now a flat 21% for C-corporations, which had previously ranged from 15-39%. Pass-through entities are now eligible for a 20% deduction on taxable profits, passed through to the owner.

What does this mean for you?

Income tax relief is expected to stimulate investment. The tax rate reduction improves net income and cash flow for corporations, opening the door for equipment rentals, IT refreshes, and facility expansions.

Bonus Depreciation

For the next five years, businesses can realize 100% of depreciation in the year they acquire an asset. Previously, businesses were only able to expense just a percentage of depreciation, spread over several years. 

What does this mean for you?

This new provision offers businesses immediate relief from their equipment and property acquisitions on their balance sheet, lowering their taxable net income.

Interest Deductibility Cap 

The new tax law limits interest expense deductions to 30% of adjusted taxable income (EBITDA) per year, effective through 2021. Previously, there were very few limitations on interest deductibility. 

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 more taxes owed. Tax leases are a great alternative and are 100% deductible as an operating expense. 

Income Tax Indemnification 

Many banks, vendors and lessors include income tax indemnification clauses within their master leases to protect themselves from changes in Federal tax rates that could impact their business. 

What does this mean for you? 

Income tax indemnification clauses allow lessors to increase rates—mid-lease term—if Federal tax rates change. The recent reduction in the corporate tax rate may cause these lessors to increase the rates on your existing tax leases to make up for their loss. 

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Take Advantage of Tax Leases

Consider using a tax lease structure over a loan for future financing needs. This structure allows a business 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. 

Common tax lease structures include Fair Market Value (FMV) leases and Fixed Fair Market Value leases.

FMV leases provide three flexible options at lease-end: 

  • Purchase the equipment for the fair market value or predetermined buyout price (for fixed FMV)
  • Return the equipment
  • Continue to rent the equipment
     

Work With Simple Terms

Not all contracts are created equal. Unlike many lessors, 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 four pages.

Our simple terms: 

  • No blanket liens
  • No covenants
  • No application fees
  • No UCC filing fees
  • No origination fees 
  • No multiple location fees
  • No legal fees
  • No credit underwriting fees 
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This page has been prepared for informational purposes only. First American does not provide tax, legal or accounting advice. 

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First American Commercial Bancorp, Inc. is a wholly-owned subsidiary of City National Bank. Deposit products and services are offered by City National Bank Member FDIC. City National Bank is a subsidiary of Royal Bank of Canada. For California clients: Loans made or arranged pursuant to a California Finance Lenders Law license. All trademarks are the property of their respective owners. Additional terms apply and can be found by visiting faef.com/terms.

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