Unintended Consequences 

Kevin F Clune, CLP

Laws & regulations are typically passed to improve a certain situation but have you noticed that they sometimes have unintended consequences? A few that come to mind are the Luxury Tax on Yachts that was enacted in 1990, the State of California EPA regulation protecting the delta smelt, and the expiration of the American Taxpayer Relief Act of 2012 or T.R..A.

I know I have you hooked now!   

With the best of intentions to raise some much-needed revenue, the United States passed the Federal luxury tax that imposed excessive taxes on yachts over $100,000. The yacht industry suffered as buyers took their business out of the country.  According to a February, 1992 New York Times article, “ In the last two years (1990 - 92), about 100 builders of luxury boats -- recreational craft costing more than $100,000 -- cut their operations severely and laid off thousands of workers. Some builders filed for protection from creditors under Chapter 11 of the Federal Bankruptcy Code. Just two years after its introduction, the U.S. Congress voted to end this “luxury tax”, after
realizing a net loss in tax revenue.

Fast forward 20 years to the California Drought of 2013 that was discussed in a recent Huffington Post piece, that stated, “For years, signs along Central California fields reading "Congress-created dustbowl" and "man-made drought" have reflected an ongoing battle between farmers and environmentalists over water from a large estuary northeast of the San Francisco Bay called the Sacramento-San Joaquin Delta. Three million acres of farmland and 25 million people from San Jose to San Diego depend on water from the delta, but environmental regulations to protect threatened delta smelt and endangered salmon have restricted the amount of water that can be pumped from it.

Of all of these, the one that may affect your business decisions, or mine, is the expiration of the T.R.A. as of December 31, 2013. This legislation had included the Section 179 provision that allowed accelerated depreciation of equipment that was acquired with a cash purchase or a lease that resulted in ownership of the equipment.

1)  How will the demand for capital equipment be affected?

2)  What type of financing will be used to acquire equipment?

3)  Will tax policy affect the type of financing used to acquire equipment?

Without getting too heavily “into the weeds”, Section 179 tax benefits are still in place but the maximum deduction amount has been reduced from $500K to $25K. A capital lease, or any lease in which the lessee owns the equipment at the end of the term, is still eligible for favorable tax treatment under the Section 179 benefit.

It may be too early to report the unintended consequences of the expiration of the T.R.A. but one result is certain, and that is more questions for your tax accountant, especially if you plan to acquire equipment this year.  

Your friendly and knowledgeable leasing professional (not an accountant),

Kevin F. Clune, CLP
Clune & Company