Proposed changes to taxes in 2018 promise to affect all corners of the economic machine. Brian Holland of Fleet Advantage outlines some of the possible adjustments and explains how they will affect private fleets and for-hire carriers.
America’s corporations with private fleets as well as for-hire carriers are ordering units at an increased pace. The latest figures from ACT Research show that orders for Class 8 trucks surged 62% in October compared with activity from the previous month, and were up 167% compared to a year ago. An economy that continues to strengthen is adding to this trend, as well as the need to replace aging equipment.
It’s critical for organizations to replace their aging equipment for multiple reasons, especially since the American economy continues to rely heavily on truck deliveries and commercial drivers. According to the Bureau of Transportation Statistics, more than $1 of every $10 produced in the U.S. GDP can be directly tied back to transport activity. Also, The American Trucking Association indicates that trucks contain 70% of America’s freight (by weight).
That being written, organizations must be cognizant of 2018 tax changes because the way they procure their equipment can have a significant effect on their overall business, bottom line and financial performance.
What are the Impending Tax Changes?
The tax plan proposed by the current administration contains several provisions that will impact equipment acquisition. There will be lower tax rates for businesses and non-deductibility of interest expense for C corporations. The provisions also will limit like-kind exchanges to real property and expense depreciable assets instead of writing them off over years. While it’s hard to say how much of this ultimately gets implemented, the key is to know how these changes may impact a company’s balance sheet, financial plan and tax strategy, and to adjust accordingly to help improve the company’s financial performance.
In terms of what is being proposed, the corporate tax rate would be cut to 20%, and there is also a proposal to allow for immediate write-off for equipment. As an example, bonus depreciation is doubled to 100% and companies can write-off the full amount of qualifying purchases in the same year of acquisition, which is intended to spur investment. In addition, used equipment will qualify for bonus depreciation for the first time. Companies can continue to deduct the cost of leased assets and the tax benefits inherent in tax-advantaged leases get passed along to the lessee through lower pricing. Lessees will also enjoy lower tax rates that will help them expand their businesses.
In many cases, a lease is still favorable over a loan for acquiring equipment. Under the new U.S. accounting rules, customers with operating leases will find that the capitalized asset cost is lower compared to a loan or cash purchase. Why? Because the balance sheet presentation of an operating lease reflects only the present value of the rents due under the contract as the asset amount, and as a result, it is still “partially” off-balance sheet. In addition, since the cost of an operating lease is reported as a straight-line expense of the full lease payment each period, there is no front-end loaded P&L effect that comes from expensing depreciation and imputed interest costs as there is when a customer borrows to make an outright asset purchase. The P&L effect is different under the international accounting standards (the expenses are front-end loaded), but the result under both standards is that leasing – compared to borrowing to buy – will show a better return on assets (ROA), return on invested capital (ROIC), or return on capital employed (ROCE) for the lessee.
Moreover, consider the discounted cost and built-in flexibility of financing, which offer additional savings, extended payment options and equipment upgrades or add-ons. Improving cash-flow management, keeping pace with technology and aligning capital asset acquisition strategy with business needs in real time creates economic and practical advantages compared to a loan.
Procurement Strategies Remain Critically Important
Private fleet organizations and for-hire carriers must still pay close attention to the way in which they procure new trucks, especially under the changing tax environment. Many organizations have begun to lease more of their trucks, whereby a shorter asset management lifecycle helps reduce costs significantly. Everything from lower fuel costs, maintenance and repair, and disposal costs are reduced in a leasing environment, while the residual risk is minimized.
Companies are taking an even closer look now at how procurement and how certain equipment lease structures affect their overall financial performance. Knowing the intricacies of different types of leases (operating versus capital, for example) can help achieve better key performance financial metrics.
The Bottom Line
Whether through economic expansion forthcoming from the proposed tax cuts or a desire to replace aging trucks, more businesses today are focused on truck procurement strategies. Decisions such as lease versus purchase, the type of lease and changing tax implications, can all have consequential effects to an organization’s bottom line.
With the first implementation of ASC 842 fast approaching and lessees recognizing that the off-balance sheet operating lease will be a thing of the past, the leasing industry is now starting to see inquiries regarding whether financing structures can be... read more
Monitor 100 2018
Implementation of ASC 842 Leases will begin for larger companies in the fiscal years starting after December 15, 2018 and in fiscal years starting after December 15, 2019 for other companies. The impact of this accounting standard is operating leases... read more