How Tax Law Changes Affect Investment Planning

Recent tax law changes provide an opportunity for rethinking investment planning. Consider how you might optimally structure investment in air and rail transportation equipment in today’s tax environment. Planning offers advantages when a solid understanding of the various ‘decision contexts’ that give rise to tax opportunities are understood. Efficiency is gained from integrating this strategy into the larger equipment investment, management, and residual remarketing picture.

The objective is to develop a ‘framework’ for thinking about how tax affects investment. Investment requires capital. Capital availability depends on the comparative profitability of financing alternatives. Financing alternatives are impacted by tax law. This upfront understanding is necessary since it oftentimes is costly to adjust investment structure and financing decisions once they are made.

Tax and Investment Planning for 2019

Effective planning requires consideration of the implications of investment on all parties. Everything being equal, and barring restrictions or limitations on income shifting, taxpayers would prefer to have income taxed at the lowest rate (or, not at all!). It is always desirable to defer paying tax as long as interest is not being charged on the tax liability. This approach requires a ‘global’ or ‘multilateral’ approach, rather than a ‘unilateral approach.

Consider both explicit and implicit taxes. Explicit taxes are the dollars paid directly to the taxing authority. Implicit taxes appear in the form of lower before tax rates of return on certain investments. In any planning effort, all cost should be considered. Tax represents only one of many. An example: the dollars you spend on tax planning are considered a tax-favored activity since for business that investment is generally tax deductible, while the payoffs (reductions in tax payable) are effectively tax-free. The higher your marginal tax rate, the higher the returns you will enjoy from your planning efforts.

Tax strategies involve the level of tax, relative rates across different activities, entity types, tax regimes, and structuring the use and economics of timing and payment of tax. Life would be simple if tax rules were unambiguous. But the tax rules are far from clear. Even if you could claim to have committed to memory the entire Internal Revenue Code, you would be able to resolve only a small degree of ambiguity in many of your investment structuring activities. Over the years taxpayers have displayed considerable ingenuity in attempts to manage this exposure.

Understanding The Impact of Tax

Understanding tax mechanics allows you to become a leader rather than a follower in business and investment activities. The rules of the game constantly change, and structuring alternatives have a real-world impact on investment returns. Are taxes ‘fair’? Of course, they are. They’re fair when someone else pays, and ‘not fair’ when you pay. That is why investment tax strategies have value!

Air and rail investment that combines efficient entity structuring with in-service equipment and experienced equipment management and remarketing have substantial value. Think ahead! Whether the Tax Cuts and Jobs Act remains in place will to a large extent be determined by the party in control of Congress. Taking advantage of opportunities now will ensure your investment is as protected as possible.

We’re rethinking air and rail investment. Contact RESIDCO.

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