FIN 419 Week 5 Regulation and Evolving Issues in Finance Example

The Rules Behind the Numbers: Bonus Depreciation, the Interest Deduction Limit, Lease Accounting, Ownership Reporting and Customers' Climate Questions in Bluewater Linen's Financing Plan

[Student Name]

University of Phoenix

FIN/419: Finance for Decision Making

Week 5 Assignment

[Instructor Name]

[Date]

Bluewater Linen Services and its plan are composites written for a model paper; laws, standards and research findings come from the sources listed, are stated generally and should be checked against current guidance.

In Weeks 2 through 4, the composite laundry valued its hospital contract, freed working capital and chose to finance $5.8 million of equipment with a term loan and its own cash. Every one of those numbers assumed something about tax law and accounting rules. The company's outside accountant pointed out that recent changes in tax law and reporting rules would change several of them. A financial decision is only as sound as the rules it assumes, and those rules have changed several times in the last few years. This paper revisits the plan in light of the regulatory environment and emerging issues.

Bonus Depreciation

The Week 2 analysis depreciated the equipment straight line over seven years, a simplification standard texts use to keep the cash flow table readable (Brigham & Ehrhardt, 2022). Federal tax law has allowed bonus depreciation, an immediate deduction of a large share of the cost of qualifying equipment. The 2017 federal tax overhaul set it at 100 percent and scheduled a phase-down beginning in 2023, and legislation enacted in July 2025 restored a full first-year deduction for qualifying property acquired after January 19, 2025. Rules should be confirmed with the company's accountant, but if the full $5.8 million can be deducted in year one, Bluewater saves about $1.45 million of tax in that year instead of about $207,000 a year over seven years.

What That Does to Value

The total tax saved is the same, but its timing changes. At the 11 percent rate used in Week 2, seven equal annual savings of $207,000 are worth about $976,000 today, while $1.45 million received at the end of year one is worth about $1.31 million. Bonus depreciation therefore raises the contract's net present value by roughly $330,000, from about $1.76 million to about $2.09 million. Zwick and Mahon (2017) found that bonus depreciation substantially increased investment, with the strongest response among smaller firms, which value faster cash flow most because they face higher costs of outside funds.

The Interest Deduction Limit

Since 2018, federal law has limited the deduction of business interest for larger companies to 30 percent of adjusted taxable income. Businesses with average annual gross receipts below an inflation-adjusted threshold, about $30 million in recent years, are generally exempt. Bluewater's receipts of about $24 million keep it under the threshold for now, so its interest remains fully deductible, as the Week 4 after-tax cost assumed. If the company grows past the threshold, the owners should check whether the limit binds.

Lease Accounting

The owners asked whether leasing the five delivery trucks would keep the obligation off the balance sheet. Under the Financial Accounting Standards Board's lease standard, effective for private companies in fiscal years beginning after December 15, 2021, lessees put most leases on the balance sheet, recording both the right to use the asset and the obligation to pay for it (Financial Accounting Standards Board, 2016). Leasing would therefore appear on the balance sheet much like a loan, and the bank's covenants count lease liabilities. The decision between leasing and buying should rest on cost and flexibility, not on how it looks.

Ownership Reporting

The Corporate Transparency Act of 2021 required many small companies to report their beneficial owners to the Treasury's Financial Crimes Enforcement Network. In March 2025, the agency issued an interim rule exempting companies created in the United States from that reporting, limiting it to certain foreign companies. For Bluewater, owned by two siblings, the change removes a filing obligation, though the rule could change again and its bank still collects ownership information under its own customer rules.

When Regulation Depends on Being Public

Some of the best-known financial regulations, such as the internal control reporting of the Sarbanes-Oxley Act, apply to public companies. Bluewater is private, so it is not subject to them. If the owners ever sell to a public company or a buyer that plans to go public, the business would need controls and documentation that meet those standards, which takes time and money. Keeping clean books and documented controls now makes the company more valuable to such a buyer.

An Emerging Issue: Customers' Climate Questions

The hospital system's purchasing department has begun asking suppliers for estimates of their greenhouse gas emissions. Large companies face growing climate disclosure demands. California passed laws in 2023 that will make very large companies operating there disclose their emissions, including, in later years, emissions in their supply chains. Federal rules adopted by the Securities and Exchange Commission in 2024 were stayed in litigation, and the agency stopped defending them in 2025. Bluewater is far too small to be covered, but its customers' reporting can reach it. A laundry uses large amounts of natural gas, water and electricity, so measuring its emissions is feasible from utility bills. The new tunnel washer uses far less water and energy per pound than the older machines, which could become a selling point in the next contract bid.

Interest Rates and Refinancing

Rates rose sharply in 2022 and 2023. Bluewater's term loan is fixed, which protects it if rates rise, but its line of credit floats. The owners should review whether prepayment terms on the term loan allow refinancing if rates fall.

Payment Systems and Fraud Risk

A further development touches the company's daily finance work. Electronic invoicing with the hospital and scheduled supplier payments, adopted in Week 3, save time but expose the company to payment fraud, especially emails that impersonate a supplier and ask for bank details to be changed. The finance manager will require a phone call to a known number before any change in a supplier's payment instructions and dual approval for payments above $25,000.

What to Monitor

The owners and their accountant should review each year whether bonus depreciation rules still apply to planned purchases, whether gross receipts approach the interest limit threshold, how leases affect covenants, any change in ownership reporting rules, customers' sustainability requirements and the cost of floating-rate borrowing. The finance manager will prepare a one-page summary for each annual planning meeting.

Conclusion

Regulation changes the numbers in Bluewater's plan. Bonus depreciation raises the hospital contract's value by about $330,000, the interest limit does not yet apply, lease accounting removes any balance sheet advantage of leasing and recent ownership reporting changes reduce a filing burden. Customers' climate questions are an emerging issue that the new equipment may turn into an advantage. An annual review keeps the plan current.

References

Brigham, E. F., & Ehrhardt, M. C. (2022). Financial management: Theory and practice (17th ed.). Cengage.

Financial Accounting Standards Board. (2016). Leases (Topic 842) (Accounting Standards Update No. 2016-02).

Zwick, E., & Mahon, J. (2017). Tax policy and heterogeneous investment behavior. American Economic Review, 107(1), 217-248. https://doi.org/10.1257/aer.20140855