Tough financial choices
Buy or lease?
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. That way, a new owner-operator can focus on building his or her business.
Unlike a purchase loan, where scheduled depreciation determines your tax deduction, under a lease your tax deduction is equal to your lease payment, typically $2,000 to $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.”
With today’s tight credit and rising new truck prices, an in-frame overhaul to keep a rig running might be more popular than ever. Still, for a borrower with excellent credit and solid buying history, trading the old truck is often the best choice, as this example shows.
The example assumes an interest rate of 7.5 percent on the new truck loan, which is available today only to borrowers with better-than-average credit. As that percentage increases, the in-frame choice looks better.
A typical in-frame will consist of “replacing cylinder kits and heads, injectors, the turbo or turbos – the power-producing parts, really,” says Bill McClusky, ATBS maintenance management consultant. If done at a shop in the engine manufacturer’s network, warranties on an overhauled powertrain are available — and worthwhile for the price, says owner-operator Ken England. He purchased extended coverage for an overhauled Caterpillar C12 for five years at less than $2,000, and the warranty saved him around $5,000 in repairs and towing charges.