Investment in air and rail assets involves complex disciplines.

These include financing, legal, bankruptcy, jurisdictional analysis, documentation skills, insurance knowledge, residual collateral value expertise, tax structuring, accounting (under the new lease accounting rules), and an understanding of the after-tax cash economics of loan vs. tax lease pricing.

Secured lending is a credit risk and collateral value game. Lease finance is the preferred option, deriving value from the tax benefits the lessor passes to aircraft and rail equipment end-users. These tax benefits take the form of lower rents, flexible terms, early buyout options, upgrades, and the equipment maintenance and remarketing skills the lessor provides.

The Tax Cuts and Jobs Act and Impact on Transport Investment

The Tax Cuts and Jobs Act (TCJA) changed aircraft and rail equipment investment economics. It will change end-user equipment procurement strategies.

C Corporation tax rates have been permanently reduced to 21%, and the corporate AMT eliminated. Non-corporate pass-through entities access to a 20% ‘Qualified Business Income’ deduction is subject to various inequitable limitations and to sunset at the end of 2025.

The Act’s swift passage left application of many of its provisions unclear. As a result, technical corrections through legislative action or regulatory guidance will be required. Some of the significant provisions that affect both C Corps and pass through entities include the following:

100% Expensing

100% Bonus Depreciation is available when equipment is placed in service: 7-year MACRS for aircraft or rail equipment used predominantly in the United States, 12-year straight line for aircraft or rail equipment used predominantly outside the United States.

If the equipment is eligible for 7-year MACRS, the TCJA will permit U.S. taxpayers to elect the higher 100% bonus depreciation (or fully expense the acquisition). Access to bonus depreciation phases down for property placed in service after December 31, 2023, by 20% every year thereafter until it disappears completely in 2027. A significant change allows bonus depreciation for used equipment if the property is ‘new to you’ (note that bonus depreciation would not be available to purchases from related parties).

Ultimately, this full expensing combined with the new interest expensing limitations (see below) will make leasing more attractive.


For example, consider a sale-leaseback. The TCJA will allow the lessor in a sale-leaseback to claim full expensing even though the user of the equipment remains the same. That means end users who have acquired and depreciated air or rail equipment will be able to enter into a sale-leaseback with a third-party lessor and continue to use the same equipment.

The sale proceeds could be used to reduce outstanding debt eliminating interest expensing limitations described below. Each pass-through entity or corporation (including members of a consolidated group) can make their own depreciation election for property placed in service, in each year, by each asset class (disregarded entities or trusts are not allowed separate elections).

However, such depreciation elections will apply to all assets in each class. That means if an entity makes a certain election for rolling stock, that election will also apply to commercial aircraft since both are in the same depreciation class.

Interest Limitation

The TCJA changed financing economics by including a limit on the current deductibility of interest expense. Section 163(j) limits the deduction of “Net Interest Expense” to 30% of the taxpayer’s EBIT (starting in 2018) or tax EBITDA starting in 2022, with any interest expense disallowed carried forward indefinitely. Eliminating a current deduction for 100% of interest translates into higher financing cost. Asset-based Bank Lenders will not be as impacted as non-bank lessors. Non-bank lessors may have to use Section 467 rent structuring to create ‘deemed’ interest income for tax purposes.

The Tax Cuts and Jobs Act provisions will require technical corrections. RESIDCO is leading a pass-through entity interest group that will explore investment alternatives and advocate for private non-corporate owned lease finance investment.

The goal? Level the competitive playing field!

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