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Dealer rentals to grow as bonus depreciation phases out

CHARLOTTE – Rental business at dealerships is poised to gain traction in the coming years as depreciation tax benefits on equipment begins to phase out.

Rentals are already gaining traction on equipment with advanced technology, and more segments of the equipment industry are likely to see increases in rental penetration due to changes in the tax law, Brett Davis, president of agriculture and construction at Trnsact, said at Equipment Finance Connect in Charlotte on Monday.

“Is ownership absolutely fundamental for this business going forward in agriculture and construction? I’m not so sure,” Davis said during a panel.

“The only reason that we haven’t seen more rental, more of this asset as a service, is because the tax law has forced [the end customer] to buy it for the bonus depreciation,” he said, noting that bonus depreciation of the equipment helped companies offset capital gains for the year.

“Now, bonus depreciation is going to phase out over five years. It’s already down 80%,” Davis said. “The mindset of having to lay out capital for buying the machine and then depreciate it 100% in the same year, that’s powerful. But that’s going away.”

In fact, rental revenue at publicly traded equipment companies has been growing, with H&E Equipment Services posting record rental revenue in the fourth quarter of 2022, thanks in part to growing rental penetration, and Davis predicts rental growth will continue.

“Dealer rental is going to grow significantly,” he said. “Rentals are up to 55% of the total construction market right now. You have the [national companies], there’s only a handful of them… they’ll have their space, but I think you’ll see the OEMs for sure are going to push and push and push for dealer rental.”