The new Economic Stimulus Plan signed by President Bush, could have the effect of lowering lease rates for corporate borrowers as leasing companies pass on the benefits of equipment leasing to their customers.
The package includes more than $40 billion in business tax breaks, including allowing businesses to more quickly deduct the cost of new equipment. The package provides a 50% bonus deduction on new equipment during the year it is put into service, with some exceptions. It also allows faster expensing of property in some cases.
Republicans say previous similar measures brought about a 4% increase in business spending in the first six months they were in effect. The non-partisan Congressional Budget Office in a recent analysis said the impact of such tax breaks was “relatively modest.”
Kent Bentsen, president of the Equipment Leasing and Finance Association, which not surprisingly liked the plan, noted that investment in plant, equipment and software made up 15% to 17% of economic output.
A provision included in the stimulus plan was “Bonus Depreciation” a term used to describe accelerated depreciation of purchased equipment that exceeds $250,000. The main benefit of this provision is to give businesses an opportunity to accelerate the depreciation of a large purchase.
Normally, if a company acquired $1,000,000 in equipment, the company could claim depreciation in the first year of $200,000 (20% of $1 million). However with the new Bonus Depreciation, that same company could deduct $600,000 in the first year (a 50% Bonus depreciation of $500,000, plus $100,000 which is 20% of the $500,000). The remaining cost can be depreciated over the remaining recovery period.
In a research note to clients, The Optimus Group strongly recommended that Corporate Finance and Treasury departments consider how this new legislation could reduce their corporate borrowing rates as leasing companies may be inclined to pass on the economic benefit of accelerated depreciation on to its customers.
