FEDERAL INSIGHT By Andy Fishburn Tax Reform Modeling F OR SEVERAL MONTHS NOW , in anticipation of tax reform discussions during the 115th Congress, a working group of the ELFA Federal Tax Committee has been modeling the effect of potential tax reform plans. Because many of the tax reform plans have similarities, and because the House Republicans have been out in front on this issue, the work has focused on the blueprint put out by House Republicans last summer ( https://waysandmeans.house.gov/taxreform/ ). by companies that do not have access to debt markets and are generally making decisions on a cash-flow basis rather than a sophisticated lease vs. buy analysis. For example, for a small business looking to purchase a copier, its invest-ment decision is more along the lines of spending $12,000 now or $250 a month for 60 months, not whether they will issue corporate debt in order to fund the acquisition. If your company has looked l The analysis did not assess situations where the lessor or the lessee may be at the effect of tax reform taxed as a pass-through entity and sub-on your business, ject to a proposed 25% rate The key aspects of the plan that were modeled were as follows: ● ● A proposed shift to 100% expensing in the first year of ownership rather than the current depreciation schedules; ● ● Elimination of the ability to deduct net business interest ex-penses (where interest expenses exceed interest income); and ● ● Reduction in the headline corporate tax rate from 35% to 20%. When comparing the environment un-der the proposed GOP blueprint to the base case (current law, but no bonus de-preciation since bonus depreciation is we’d like to hear from you. being phased out) the following are the key findings: One other aspect to the modeling is of importance to the equipment finance industry. Logically, ● ● The cost of leasing equipment goes up because the value if the Congress were to limit the ability to deduct interest of the deduction of the lease payment goes down as tax expenses, one would need to carve that out of lease payments, rates are reduced. in effect setting up a principal and interest component to any ● ● The cost of buying equipment goes up because of the ac-lease payment, possibly including operating leases. Thus, the quiring company’s inability to deduct interest payments interest component portion of the lease payment would no and the value of the deduction of the 100% expensing is longer be deductible to the lessee, and would count for netting reduced due to the reduced tax rate. purposes to the lessor. Luckily, the early indications are that ● ● Leasing is advantaged over buying due to the acquiring under the new lease accounting rules, this will be occurring company’s inability to deduct interest payments. anyway for accounting purposes. The working group did look ● ● Under the limited scenarios that were modeled, lessees are at this issue and the early results indicate that when lessees ultimately better off under the GOP blueprint because the are only allowed to deduct the “principal” portion of a lease benefits of the reduced tax rate on income outweigh the payment, it appears, based upon early analysis, that the lease increased costs of acquiring capital. vs. buy decision reverts toward the baseline; however, not ● ● Costs of municipal leasing will go up due to the value of entirely, and this needs further analysis, which is ongoing. the interest deduction to the lessor (once netted) being If your company has looked at the effect of tax reform on reduced by the lower statutory tax rate requiring an in-your business, the ELFA Federal Government Relations team creased cost to maintain a consistent rate of return. would like to know. We’d also like to know if you think that the results outlined above are not what you would expect in There are several important caveats to this modeling exercise: your business. Please contact Andy Fishburn at afishburn@ ● ● This analysis was done in a vacuum where other macro-elfaonline.org if you’d like to discuss your results or if you’d and microeconomic changes to the economy and the im-like to participate in further efforts to fully understand the pacts of other proposed changes to the tax code were not impacts of tax reform on our industry. ■ analyzed. ● ● Assumptions were made as part of this analysis that will not hold true in all cases (e.g., it was assumed that the cus-For more information, contact Andy Fishburn , ELFA tomer is not in a net operating loss situation). Vice President of Federal Government Relations, at ● ● Net interest is not defined, and other key factors have not afishburn@elfaonline.org. been fully articulated by the GOP blueprint. ● ● The analysis that was conducted does not specifically look at the impact of the GOP blueprint on capital acquisitions 46 MARCH/APRIL 2017 EQUIPMENT LEASING & FINANCE MAGAZINE