Hard Financial Choices
Finding the bottom line for two paths in a financial matter can be as murky as driving through fog. What might appear to be the most cost-effective choice isn’t always what it seems. Following are analyses of some common but tough decisions that owner-operators face, with enough information to guide you toward a wise decision.
Buy a truck or lease it?
Few owner-operators lease a truck. All things being equal over enough years, buying leaves you with more in your pocket.
A new truck is a three-year depreciable asset; the most common depreciation schedule yields deductions overlapping four calendar years. So for a five-year loan, the trick is planning to cover cash flow in the fifth year, after the tax deduction has ended.
On the other side of the buy-lease debate, five-year TRAC (terminal rental adjustment clause) leases, which have a buyout at the end, have their proponents. Many carriers, for instance, structure leases to favor novice owner-operators with little to no truck-buying history or cash for a down payment.
“We’re not seeing a lot of folks who have that kind of money and can afford a big down payment,” says Steve Crear, Schneider Financial’s general manager.
Another advantage of leasing is that “you’re generally not as committed to the length of the contract,” says Mark Miller, tax manager for ATBS, the nation’s largest owner-operator financial services provider. That means it’s easier to get out of the lease or renegotiate into a newer truck to keep maintenance expenses low.
“We like to see the deal structured in order that before the five-year end they could trade,” says Crear. “That’s an ideal guideline – 42 months, 48 months to trade.” The goal is to keep truck maintenance down and tax management simple.
Unlike a purchase loan, where scheduled depreciation determines your tax deduction, under a lease your tax deduction is equal to your lease payment, typically $2,000to $2,500 for a new truck at Schneider, Crear says. “You deduct everything just as it’s paid.”
Compared to buying, leasing generally costs you more, but saves more in taxes. In some programs, like Schneider’s, you can reduce your monthly lease payments to reflect your tax savings, a tax management tool Crear says is invaluable to new owner-operators.
On the other hand, claiming depreciation on a new truck gives you the flexibility to structure the rate to match your tax deductions. But Miller warns against spending money “just to take advantage of the tax deductions. If you need tax deductions, we’ll raise our fees,” he jokes. Rather, “Let your business dictate your tax decisions.”
Length of the loan term
If you’re buying, the bottom line is the longer your term, the more you pay. See estimates below. The ideal loan term for a three-year depreciable asset like a heavy-duty truck is three or four years, during which you can reap the tax benefits of depreciation to maximize the affordability of the monthly payments. After depreciation has expired, tax savings will be limited to interest payments.
New truck: $118,000 at 7.5% interest
Loan term length/years: 3 4 5 6
Monthly payment: $3,120 $2,425 $2,010 $1,734
Total vehicle cost: $130,018 $134,107 $138,289 $142,562
2009 aerodynamic truck, 70-inch sleeper; purchase price: