Tax Reform and Lease Accounting Changes Opportunities for the MTS Appraiser?

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1 Tax Reform and Lease Accounting Changes Opportunities for the MTS Appraiser? Paul R. Cogley, Jr., ASA Senior Vice President Commercial Valuation Manager Banc of America Leasing Bank of America Merrill Lynch

2 Disclaimer The views and opinions expressed in this presentation are those of the author and do not represent official policy or position of Banc of America Leasing and/or Bank of America Merrill Lynch. This presentation is intended for educational purposes only and does not replace independent professional judgement. Statements of fact and opinions expressed are those of the author and are not the opinion or position of the American Society of Appraisers. The American Society of Appraisers does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented.

3 The Tax Cuts and Job Act In late December 2017, Congress passed the most significant piece of U.S. tax legislation in the past 30+ years. This bill made many significant changes to all area of tax law and practice, impacting almost every sector of the U.S. economy. Reduced top Corporate Tax Rate from 35% to 21% Provided for 100% Bonus Depreciation for new and (most) used equipment Limited Net Business Interest Deductions to 30% of Adjusted Taxable Income Repealed the prior Corporate Alternative Minimum Tax (AMT) regime Created the BEATs (Base Erosion Anti-Abuse Tax) regime Repealed Like Kind Exchange (Section 1031) for personal property and equipment Restricted the ability to utilize and carry-back NOLs Permanently increase Section 179 Expensing Limits and indexed them to inflation Provided that farm and agriculture equipment will now follow normal MACRS; established a 5 year recovery for most farm equipment Created a new up to 20% deduction for pass-thru business income

4 What Opportunities Does that create for Appraisers? 100% Bonus Depreciation for new and (most) used equipment Market for used equipment is likely to heat up as firms try to take advantage of the change in the tax law (WSJ 2/24/2018) Financial institutions will need appraisals of used equipment in support of new leasing opportunities where lessee cannot use the tax benefits Potential for increased sale/leasebacks - aircraft, railcars, energy industries Issue prior use (as it pertains to a taxpayer s ability to claim bonus depreciation on used equipment) means a prior depreciable interest in the property. Creates a burden to track all prior asset history in order to correctly determine whether they have ever owned an asset previously Treasury has asked to comments and recommendations Potentially a safe harbor limit of look-back period

5 What May Not Be an Opportunity for Appraisers? 20% Deduction for Pass Through Income Specific Service Businesses cannot take advantage of the deduction Health Law, Consulting Athletics Funeral Services Brokerage Services or Any trade or business where the principal asset of such trade or business is: The reputation or skill of one or more of its employees or owners Which involves the performing of services that consist of investing and investment management trading, or dealing in securities, partnership interests or commodities (excluding engineering and architectural) Check with your accountant

6 Accounting Standards Codification (ASC) 842 Lease Accounting Effective December 15, 2018 (Calendar year 2019) for public companies; one year later for private companies The new standard requires lessees to capitalize the present value (PV) of the rents and other lessee payment obligations on all leases, other than short-term leases with a term of 12 months or less Different accounting treatment between service arrangements and leases may require the identification and separation of the lease components from the services component where the contract contains both elements Substantial changes to accounting systems may be required (100 data fields or more) including information related to payments, expenses, and end of term options all recorded at the asset level Credit agreements containing covenants need to be examined to determine if the new lease accounting will impact those covenants

7 What Opportunities Does that Create for Appraisers? Different accounting treatment between service arrangements and leases may require the identification and separation of the lease components from the services component where the contract contains both elements Most lessees do not know the breakdown of lease and non-lease components in their lease contracts Lessees can use estimates opportunity for appraisers to assist in the determination of the nonlease components. For example, consider a lease for photocopiers. A determination of how much of the lease payment is for ink, paper, maintenance or insurance would identify the non-lease and (therefore) lease components of the payments

8 What Opportunities Does that Create for Appraisers? Substantial changes to accounting systems may be required (100 data fields or more) including information related to payments, expenses, and end of term options all recorded at the asset level Collecting data for leases with multiple assets will be especially burdensome Lessees have to find and record significant amounts of information to comply with the new standards this could be an opportunity for appraisers to assist with the gathering of the required information 57% surveyed by E&Y in 2016 said this would be moderately to significantly difficult

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