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Capital Investment Idea Proposal

Capital Investment Idea Proposal
 

Are companies increasing their capex spending as a result of more favorable expensing rules? Which industries are most affected?

 

Report Available: November 1, 2018

 

Blueshift’s initial research found potential incentives for capital spending in the major tax reform law approved last year. As companies develop their 2019 spending plans, the ability to fully expense new and used equipment could benefit industries that rely on heavy machinery or expensive infrastructure. The new regulations, however, may be getting overshadowed by trade wars, interest rate hikes, and other political uncertainties heading into the midterm elections.

 

Observations

  1. The Tax Cuts and Jobs Act approved in December 2017 expanded the tax benefits for businesses buying expensive equipment in two important ways: It increased so-called “bonus depreciation” from 50% to 100% through 2022, meaning businesses can fully deduct the cost of capital expenses in the first year, rather than gradually writing them off over numerous years; and the law now allows businesses to also take such deductions on used equipment. The changes, among many in the new law, were aimed at spurring new investments in expensive business equipment, including railcars, aircraft, ships, machinery, and even computer software.
  2. The tax code changes could be a boon to capital-intensive industries such as construction, trucking, energy, and manufacturing. However, the decision to take advantage of bonus depreciation is not cut and dry for every business. The new law also eliminates net operating loss carrybacks and limits loss carry forwards, so that businesses will have to explore their individual tax situations before electing to take advantage of bonus depreciation.
  3. Restaurants and retailers who were hoping to take advantage of the new rules with interior renovations to their properties are waiting on Congress to fix a drafting error in the law. The act’s new definition of “qualified improvement property” was written in such a way that internal remodeling projects were not eligible for immediate expensing. Lawmakers have acknowledged the error and are working on a fix, but it is not clear when or if such a patch will be approved.
  4. Despite the potential advantages of the new bonus depreciation rules, the monthly confidence index for the equipment finance industry declined in August for the seventh time in eight months. Less than 17% of survey respondents think demand for capex financing will increase over the final four months of the year, though none expect demand to decline. Finance executives said they are concerned about rising interest rates and the possibility that international trade wars could continue to escalate, affecting equipment manufacturers’ prices. Kiplinger’s latest forecast for business equipment spending predicted a 7% increase for 2018, an improvement from 2017 but modest in historical terms, hindered by new tariffs on items such as steel and aluminum.
  5. In Blueshift Research’s May 17 Oil Patch Update, sources said oilfield activity was growing and that some equipment orders were on the rise, though the biggest ticket items like new rig orders might not be placed until 2019. Blueshift’s August 10 Tech Trends report found that the U.S.’s trade war with China was starting to affect delivery times for computer and networking hardware, which could have tax implications as businesses can only use the new depreciation rules after their new equipment has been put in use and not at the purchase time.

 

What is the difference in this budget cycle compare to others? What behavioral changes are taking place as a result of the new tax law? Are purchases being accelerated? Which industries will benefit the most from 100% bonus depreciation? How does the addition of used equipment to the expensing rules change the equation for businesses? What types of equipment manufacturers are seeing increased orders? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Chief financial officers, Equipment financing specialists, Equipment manufacturers, and Tax professionals.

 

Companies: Boeing (BA), Caterpillar (CAT), DowDuPont (DWDP), ExxonMobil (XOM), General Electric (GE), Verizon (VZ), Stanley Black & Decker (SWK), Ingersoll-Rand (IR), 3M (MMM), Honeywell (HON), Berkshire Hathaway (BRK), JB Hunt (JBHT), Chevron (CVX), Schlumberger (SLB)

 

Research Begins: October 15, 2018

 

Are you aware Intro-act, our corporate access solution, is part of the Blueshift Research ecosystem? To learn more, go to Intro-act.com or check out our video suite.