Most economists felt this was inevitable, and I’ve been talking about this for a while now. Well, we’ve moved out of speculation and into reality – with the inflation numbers being what they are (the highest in 40 years), raising rates is the only real response the Federal Government has. 

But more telling are the comments by Federal Reserve Chairman Jerome Powell on Monday, 3/21/2022. In short, he laid the groundwork for multiple increases this year, and those increases may be larger than is typical.

Specifically, he stated “if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”

In quoting him, news outlet Reuters called it his “most muscular message to date”.* 

That’s fairly strong language, and should be taken as a very clear message to businesses everywhere. Rates will not only continue to rise, they will rise higher than we’ve become accustomed to. 

How long will this go on? If history is any indicator, we’re looking at more than a year. Maybe several years. Inflation doesn’t magically fall. It takes time. Lots of time. 

This means rates will rise, and rise again and again until supply and demand are more in synch, and inflation falls.

What This Means for Your Company

It means you are going to pay more to finance equipment tomorrow than you will today. And the longer you wait, the more you will pay. This will happen across the board: when the Fed rate goes up, the rate you pay goes up. Crest Capital, as well as every other lender in existence, is powerless to prevent this.

My advice? If you are going to need equipment in the next 18-24 months, get it now. 

Seriously, you will pay less now than you will in just a few months. It is very possible – actually, based on comments, it’s almost a certainty – that we’ll see four or five more rate increases this year. Some called it speculation a month ago, but the writing on the wall could not be any clearer. 

Lock in with a great rate now and shelter yourself from the inevitable increases. If you want to see what a current monthly payment looks like, use our quick and easy equipment financing monthly payment calculator.

_{*https://www.reuters.com/business/fed-must-move-expeditiously-if-needed-more-aggressively-powell-says-2022-03-21/}

The two accounting methods are: 

Book Accounting (which could simply be called “accounting”) utilizes Generally Accepted Accounting Principles (GAAP), whose rules are set by the Financial Accounting Standards Board (FASB). 

Tax Accounting relies on the Internal Revenue Code (IRC), and, as you may have guessed, is used  by the Internal Revenue Service (IRS).

So what’s the difference between book accounting and tax accounting? 

Book Accounting provides business owners and other interested parties (such as lenders) with accurate and detailed financial data, giving them a clear picture as to how the business is actually doing.  

Tax Accounting provides the IRS and other taxing authorities (such as States and municipalities) with taxable income and deductible expenses, which of course determines how much tax the business owes.

To be honest, the differences between the two are fairly small. But one key difference has a LOT to do with equipment and equipment financing (and leasing, which is what prompted this series in the first place). 

This difference is in how equipment and assets are viewed and depreciated.    

Under Book Accounting, the cost of any Equipment is depreciated/expensed over a period of time matching the Equipment’s useful life. This ‘Straight-Line’ method is the most common method used to calculate depreciation expense under GAAP. 

So basically, you buy equipment, and depreciate it a little each year depending on how long the equipment is supposed to reasonably last. 

Under Tax Accounting, the cost of Equipment is depreciated/expensed much quicker, which minimizes the immediate tax liability. Tax Accounting uses what’s called the Modified Accelerated Cost Recovery System (MACRS) method, which allows larger amounts expensed in the initial years.

In recent years, Section 179 and bonus depreciation are subtracted before computing MACRS deductions, allowing businesses to fully write-off the cost of equipment in the year it is obtained. Currently, the bonus depreciation is 100% thanks to 2017’s Tax Cut and Jobs Act, with no upper limit, so almost all equipment will fall under this. 

Real Quick: WHY?

People have asked “why are there two accounting methods”? The answer can be very intricate, but it can also be simple. Imagine you wanted to loan a business money. You want to make sure they are stable, with solid income. 

The following is general, but illustrate why both exist:

If you look at the business through a tax accounting lens, the business may seem to have low income, because of all the short-term high depreciation to save on taxes. Based on only that, you may not loan them money. 

But a look at them through book accounting shows the company’s true worth… you may have a fine loan candidate there. 

The finance guy in me knows it’s useful to understand the fundamental differences between the two accounting methods, which I hope I’ve accomplished for you in this post. 

First of all, I’ve already discussed how Section 179 can actually be profitable this year – that’s because the total amount of taxes saved will almost certainly exceed your equipment financing payments.

But what if we looked at it a different way? What if instead of assuming “the total amount of taxes saved” gets added this year, it instead gets added over time… (keep in mind, nothing is changing – we’re just looking at it differently.)

• You finance a piece of equipment for $50,000 in October 2010
• Your monthly payment is $1,120 a month
• Your annual return/ gain from having the equipment is 3% (or $125 per month)

Let’s stop here for a second. You’re paying $1,120 a month, but you gain $125 a month by having/using the new equipment. Follow?

• This means your “net” monthly payment is $995. ($1,120 – $125 = $995)
• In Dec 2010, you take a 50k Section 179 Deduction. The net tax savings is $17,500

Let’s stop again. We’re paying a net of $995 from Oct 2010-onward. Instead of looking at this $17500 savings as a 2010 number, let’s apply it to our payments over time.

• Taken over the life of the loan (meaning starting from 10/2010), that $17,500 will cover you until February 2012. You will have a positive cash flow until February 2012. This means you used the equipment for 17 months, and knocked 17 months off the equipment financing term, without paying a (net) dime. Where do you see your business in February 2012? Especially with some shiny new equipment.

Read it again if you have to, but this is real, and this is why I’m so bullish on the “Section 179 and equipment financing” combo.