On Dec. 22, 2017, President Donald Trump signed into law the most sweeping overhaul of the U.S. tax code in 31 years. One of the most talked about items in the Tax Cuts and Jobs Act (TCJA) of 2017 was the dramatic reduction of the corporate tax rate from 35 percent to 21 percent. As we approach six months since the bill was signed, we’re getting a clearer picture into the ways this reform is impacting middle market companies and how they plan to spend and invest in the future.
When KeyBank last polled middle market leaders about the pending tax reform toward the end of 2017, they expressed enthusiasm and hope about the potential impact. In a more recent KeyBank survey of 300 middle market business owners/C-suite executives, most respondents now feel confident in their understanding of the new law as well as its ability to free up money for investments in business growth, employees, benefits and more. It showed that most owners are planning to or are already investing in their business and their employees. Here’s the breakdown:
Digging deeper into the survey, tax reform is fueling economic optimism. Nearly 90 percent of respondents say their outlook is good or better.
That optimism is also prompting many middle market companies to consider expanding. While 33 percent of respondents said they plan to expand or grow their business, more than three quarters of those respondents plan to expand in the next six months, primarily by adding employees, followed by purchasing equipment, adding locations and renovating facilities.
Equipment leasing an attractive option
The equipment leasing and financing business has also seen a bump, thanks to some very specific changes in tax law that make financing new equipment a very smart move for many businesses.
For example, the 100 percent expensing benefit can be a huge windfall for businesses with sufficient taxable income to claim it, and the repeal of the alternative minimum tax (AMT) has businesses reconsidering their tax lease acquisition strategy. In addition, the treatment of net operating losses, which can now be forwarded indefinitely, will allow businesses to consider a wider set of equipment acquisition options.
Overall, the new tax law will not change the tried-and-true benefits of leasing that have always supported businesses growth. Equipment financing continues to provide enhanced cash flow, allowing businesses to avoid large out-of-pocket costs and effectively manage cash from operations. It also gives unparalleled flexibility and offers asset-management features, including options to keep equipment in place for the long haul or upgrade to the latest technology.
Equipment financing also helps preserve credit lines to support day-to-day business operations rather than long-term capital needs. The TCJA now places limits on deductions related to interest accruals and payments made on debt in a given tax year. Unfortunately, this could negatively affect heavy borrowers and those investing in business growth and expansion activities. Equipment leasing could help to offset the pain, however, because rental payments arising from a lease are not included in this calculation. Assessing your business’s current and future asset needs in the form of a Lease vs. Buy Analysis will help determine whether a lease or loan is the best alternative for your organization.
M&A top of mind
Another option for growth includes merging with or acquiring another company. Almost 80 percent of owners and executives who plan to expand or grow their business say they are “somewhat to extremely likely” to complete an acquisition in the next six months. According to a recent Wall Street Journal report, many companies were in a M&A holding pattern before tax reform took hold; now that the reality of reform is settling in, companies are willing to pay more for acquisitions.
Simplification equals comfort
Overall, leaders are beginning to understand and are feeling comfortable with the intricacies of new tax policy. Tax law has been historically viewed as complex and challenging for any business. Part of what this latest tax reform aims to do is to simplify the process and enable businesses to free up more cash to invest in the economy.
The goal of making the tax process easier seems to be coming to fruition. A full 85 percent of survey respondents say they have a moderate to high understanding of the new tax laws. This understanding extends to expectations of a positive impact. In fact, 74 percent of those surveyed say they expect moderate, high or extremely high savings as a result of the new policy, which bodes well for the anticipated effect of an economic boost.
So what does this all mean? If you own or run a middle market business, you have many options to consider and many decisions to make about how you will leverage these new-found savings.
Whether you decide to increase cash reserves, acquire new assets or even implement a stock buyback program, there will be implications on business opportunities. This is true regardless of the size or scope of your business—the effects of tax reform will vary greatly, and how you respond to them will be a reflection of your leadership and goals for your company.
James Barger is president of KeyBank’s Rochester Market. He may be reached by phone at (585) 238-4121 or email at [email protected].e