The beginning of each year is a natural time for reflection and planning. For business financial managers, one responsibility in particular that this applies to is capital expenditures (capex).
It’s a new year. The business has a new budget and business plan. So now is a good time to review how much equipment the plan calls for you to acquire in 2019, and to consider the best way to finance it.
Indeed, at this time of the year, every organization should do a review of its equipment acquisition plans and re-evaluate whether, based on the quantity and timing of purchases, the best method of funding those acquisitions is to pay cash, borrow or lease.
What are your capex plans?
In December we conducted our first Economic Pulse Survey of clients and prospects. The study was designed to give businesses an economic snapshot, as seen by their peers. When we asked organizations what they planned to invest in this year, a full 30% said upgraded or new equipment. (Only expanding and developing staff, at 33%, was a more popular response.)
If your business is one of the many planning to acquire equipment in the coming year, it’s important to take a fresh look at funding options. Just because you paid cash, leased or borrowed last year to acquire equipment doesn’t mean that’s the right solution for 2019.
Evaluate tax implications
Tax law reform enacted for the 2018 tax year made acquiring capital assets more economically attractive, and the advantages the law ushered in remain in place. Be sure to review your financing options in light of its major provisions:
▪ 100% expensing. Organizations can fully expense both new and used equipment. This significantly reduces the overall cost of putting an asset into service. Be sure to investigate and learn if your business, given its tax position, can take full advantage of 100% expensing.
▪ Limits on business interest deductions. Currently, businesses with average gross receipts of $25 million or more can only deduct business interest equal to 30% of EBITDA (earnings before interest, tax, depreciation and amortization). As part of your review of equipment finance options, be sure to gauge how this rule will impact your after-tax cost of debt and weighted average cost of capital.
Conduct a thorough review
From year to year, organizations change. Their tax positions change. Market dynamics change. All of this can impact equipment finance decisions. As part of your review of options, take into account all of the following factors:
▪ Current and future after-tax cost of debt
▪ Current and future after-tax cost of leasing
▪ Financial covenants
▪ Net operating losses
▪ Tax credits
▪ Tax loss carryforwards
▪ Current-year tax write-offs
▪ Capex budgeting (this year’s needs and those of subsequent years)
It’s the time of the year for important financial planning. That makes it the ideal time to meet with a relationship manager at Hancock Whitney Equipment Finance to review cash, debt and leasing options, as well as structures that might facilitate your business growth.
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Chris Bucher is managing director of Hancock Whitney Equipment Finance, LLC.
This information is educational and informational in nature, and not intended to be used as tax, legal or accounting advice. We advise you to consult your tax, legal and accounting advisors regarding your tax needs.