It may be unrealistic to expect booming profits for truck and freight brokerage companies anytime soon. But with manufacturing on the rise and retailers gradually building up their inventories, all signs point to an overall improvement in the trucking industry. Investing in new equipment is one important way you can position yourself to take advantage of economic growth. But should you lease or buy that equipment?
Often times, trucking business owners make their purchasing decisions based on cost. However, whether you lease or buy can have important tax implications that will influence cost in the long run. When deciding which route to take for growing your fleet, it’s crucial to consider all scenarios.
There are two main types of leases: the capital lease and the operating lease. While both allow a business owner to use a truck for a designated lease period, each is treated differently by the IRS. Capital leases are typically taken out over a long term. At the end of this time period, the lessee is given the opportunity to buy the truck or trucking equipment at a substantially discounted price. Because capital leases allow business owners to treat their leased equipment as assets, trucks can be depreciated. The lease itself is counted as a debt, allowing the business owner to deduct interest payments.
Operating leases usually involve much shorter terms than capital leases. They are commonly used for high-tech equipment that is likely to become quickly outdated or irrelevant. Because of the abbreviated time frame, business owners are generally not required to assume any risks or benefits associated with owning the equipment other than those inherent with the normal use of the asset. When the lease is up, the equipment is returned to the lease company. While a purchase option can sometimes be negotiated, price is typically set at or close to market value. Lease payments are deductible but, because the equipment may not be treated as an asset by the business owner, depreciation is not.
As with a capital lease, purchased trucks and equipment can be treated as assets, and loan payments as liabilities. Unlike with a lease, however, the equipment can be counted on the balance sheet immediately. In addition, depending on how a company is structured, it may be possible to deduct all or part of the cost of a large non-passenger truck in the year it was purchased in accordance with Section 179.
Obviously, there are considerations besides tax when deciding how to acquire equipment. Trucks on short leases can be more easily swapped out for new technology as the need arises, while purchased vehicles provide more independence and a sense of ownership. Buying a truck reduces taxable income, but requires business owners to sacrifice trucking cash flow. Leases, on the other hand, can be obtained with little to no money down. Rather than purchase trucks individually, some business owners may choose to acquire entire fleets through the financed purchase of an existing trucking business for sale or a trucking company merger. In any case, considering all of your possibilities before making a decision can reduce risk and increase the potential rewards of growing your truck fleet.