Tax reform has uneven impact on equipment finance sector, ELFF finds
Tightened interest deduction limitation adversely affected lessors
Tax reforms under the Tax Cuts and Jobs Act resulted in an unequal impact on the equipment finance industry and created a less favorable environment for lessors.
Key provisions of the Tax Cuts and Jobs Act (TCJA) have had mixed effects on the $1 trillion equipment finance industry, with lessors facing significantly greater challenges than non-lessors, according to a May 29 report from the Equipment Leasing and Finance Foundation (ELFF). The study found that while bonus depreciation made equipment purchases more appealing through immediate expensing, it also reduced incentives to lease.
Meanwhile, the Section 163(j) interest deduction limitation — tightened in 2022 from 30% of EBITDA to 30% of EBIT — spurred a rise in leasing activity but led to sharply higher disallowed interest deductions for lessors, according to the report. Overall, lessors face disallowed interest at double the rate of non-lessors under the tax reform, and nearly triple for railcar lessors.
Researchers noted that operating lessors in capital-intensive sectors became disproportionately burdened by the interest cap, potentially increasing costs passed on to small businesses if no legislative relief is provided, according to the report. The report also calls for the restoration of permanent 100% expensing and reforms to the interest limitation to maintain momentum in equipment investment.
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