Has Tax Reform Spurred Investment in Acquisitions or Equipment?

May 15, 2018
by Josh Anderson

CHICAGO, IL — At CapRE’s Chicago Data Center Summit, a rousing panel titled The End-User Approach to On-Prem, Hybrid, the Cloud, and Tomorrow’s Compute Needs and Initiatives featured an in-depth discussion about the economics and capabilities of various compute architectures. At the conclusion of the discussion, a member of the audience rose their hand to ask a question.

“Do we see the change in the corporate tax rate, from 35% to 21% spurring more investment in acquisitions and equipment for on-premise?” asked the audience member, earnestly. And the answers they got from three panelists likely surprised them.

First, Thomas McKinney, CFM and Director for Data Center Development at FORSYTHE responded. “You know what, I haven’t seen it yet. It may be too early,” he began . “I can tell you that we are hiring. We do know that we’re going to have more capital for hiring, and that we were just acquired. Sirius Technology acquired us. And we are buying more talent. I would say that’s all probably market economy based, and there is some strength out there now. As far as on-prem, off-prem, I don’t think we’ve been out there quite long enough to see it. At least I haven’t.”

Next, Emil Sayegh, CEO, Hostway Services, Inc offered some brief agreement. “I’m the same way,” he shared. “We haven’t seen it yet, but we expect to see it and we hope to see it.”

However, Moderator Mike Krelitz, Sales Director for the Central Region & Managing Director for the Midwest Region at Winthrop Resources Corporation chimed in with some instructive guidance on how to really get to the bottom of this issue.

“We’ve done some very close study of this, in preparation for it. And we’ve found that it’s not all that you think it’s going to be,” he revealed. “That was really the result of it, in the sense that there is bonus depreciation now, that’s given for making acquisitions of capital equipment. Which allows clients to take in advance all of the depreciation. Which you would think would be great. Except for when you take a look at the fact that now, instead of 35% percent, it’s at 21%. So the great bonus depreciation, which has now accelerated, and which allows you to pay for everything in advance, which would have been great at $.35 dollars, is really at $.21 dollars.”

But why does that matter? Krelitz then dove deep. “Because in the end, when you stack up the cost of your own capital, and its tax benefit, in today’s dollars, there really isn’t that much difference in buying it today and having an accelerated depreciation,” he explained.

data center summitIn fact, back to the topic of accounting, one of the real benefits of when you actually put pen to paper or run that spreadsheet on these things, is that because rentals are tax-deductible – and for example we provide 100% financing for the whole thing – the client actually gets a greater benefit for paying for their rentals running through their balance sheet, than they do in taking the bonus depreciation,” he continued. “You wouldn’t think that. But if you actually run the math, there is a lot of benefit in continuing to pay for rental and operating-type expenses, even in the face of the bonus depreciation, because the amount is so much smaller. So yes, buy more.”

For more from The End-User Approach to On-Prem, Hybrid, the Cloud, and Tomorrow’s Compute Needs and Initiatives, check out earlier CapRE Insider Reports:

Banner Image (L-R): Mike Krelitz, Sales Director – Central Region & Managing Director – Midwest Region, Winthrop Resources Corp. & Emil Sayegh, Chief Executive Officer, Hostway Services, Inc.

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