Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Will the Federal Reserve raise interest rates again this quarter?
Over the past three years the Fed has been steadily raising rates to push a return to “normal” after nearly a decade of almost zero percent rates. 2018 was no exception, it saw a hefty increase.
At the end of last year and into 2019, the mood toward continued quarterly rate hikes has cooled a bit based on the current economy, inflation, trade tariffs and employment rates. Most economists are predicting slower economic growth ahead and believe it would be crazy (not prudent or irresponsible) if the Fed raised rates again at this point. What does this mean for your business strategy and planning? Slower growth does not mean no growth and there is a good chance rates will go up at least one time this year. Does this mean you should hold off on borrowing money to invest in your business? No, quite the opposite.
If you are thinking about making an equipment purchase but are waiting to see what rates do, there is a good chance they are going up. So, it would be smart to get financing now. Time is money when it comes to securing capital for your business. The longer you wait, the greater the chance you will pay more interest. Lending institutions are sometimes able to delay passing some of the rising costs of money on to their customers but after a certain point, they have no choice. It would be advantageous to lock in a rate now.
Additionally, fixed-rate financing adds stability to your balance sheet. This is important when seeking additional financing as lenders want to see consistent historical trends they can point to and say: “I think this business will make its payment every month.”
Given the upward pressure on rates, it is also important to evaluate the debt already on your balance sheet and reorganize it into appropriate terms and rates. If you are currently charging business expenses on a credit card, have a short-term loan agreement that requires daily payments, or have an adjustable-rate loan, now is the time to pay off this debt, if possible, or refinance it into a fixed-rate, longer-term financing facility. You want to steer clear of variable rates that will increase when the Fed raises rates or loans that have aggressive payback periods that put a crunch on cash. By refinancing to a more stable financing structure, you will free up cash to pay for short-term investment needs with daily cash flow. For example, we recently refinanced a new customer’s existing debt obligations into a longer-term, fixed-rate structure. “This lowered his monthly payments and freed up more cash flow to be able to make some big moves in his business,” says Spencer Thomas, our president. “He is considering an acquisition to expand and actively increase his internal capabilities.”
Equipment leases and finance agreements typically offer 100 percent financing and include soft costs, such as delivery, installation, training and other services. They also are based solely on the equipment purchase, thus keeping other assets free-and-clear. Some structures provide off-balance sheet options as to not affect borrowing limits and covenants on your bank loans. Bank loans are also a stable option. They typically require some money down and additional collateral to be pledged but rates can be lower. It is important to talk to lenders about options and then decide what best fits your needs. As mentioned previously, in an unpredictable interest rate environment, ideally you keep cash for short-term needs and growth since financing for this purpose usually carries a variable rate and needs to be paid back over a short period of time.
Section 179 of the federal tax code allows businesses to deduct the full purchase price of qualifying equipment, software and vehicles (if used for businesses purposes more than 50 percent of the time) from the business’s gross income in the current tax year. At the beginning of 2018, Congress signed into law an increase in the deduction amount. It doubled from $500,000 to $1 million for 2018 and beyond.
The law also allows for bonus depreciation after the $2.5 million equipment spending cap has been reached. In 2018, the bonus depreciation increased from 50 percent to 100 percent and now includes both new and used equipment. It was made retroactive starting Sept. 27, 2017 and runs through 2022.
When partnered with a properly structured equipment lease or an equipment finance agreement, your tax savings through Section 179, in many cases, will exceed your yearly cash outlay. In other words, the deduction will be more than your payments in the year you purchase the equipment. It is a true cash savings.
So, make sure you talk with your tax adviser about your specific situation. For more information on these rules, check: IRS: https://bit.ly/2tzHfJy and Congress: https://bit.ly/2CpbIMk
Lastly, we can’t talk about rising cost of money and capital equipment investments without talking about trade tariffs. The increase in tariffs on steel and aluminum is directly affecting equipment manufacturers. Some of them increased their prices to the consumer the minute the increased tariffs went into effect. Others have been able to absorb the cost increases. But they won’t be able to do this forever. Eventually, the consumer will be paying more for the same equipment. It is important to take this into consideration when deciding when to buy.
Whether or not the Federal Reserve raises or lowers rates at any given time is anyone’s guess. During this volatile period, as a business owner, it is advantageous to create stability in your organization, so you can strive forward during any situation.
EXAMPLE
Total equipment purchase $100,000
2018 Section 179 deduction
(total 1st year deduction 100%) $100,000
Cash savings on purchase
(assuming 35% tax bracket)
Cash cost of equipment $65,000
Yearly financing payment on cash cost
(assuming 5.5% interest; 5-year term) $14,902
Hourly cost of equipment purchase $7.16
(assuming 2080 hours/year)
