Don’t rush out to buy a new rig just to take advantage of a new tax provision that gives you even more depreciation than normal.
You might have heard about a new tax provision that gives you even more depreciation than normal. There is such an animal, but don’t rush out to buy a new rig just to take advantage of it.
Put simply, it gives you a tax break now that you would have normally waited two or three years for. That sounds like a good thing, but only if you’re disciplined enough to manage your business such that you can live with a higher tax bill down the road.
Here’s how the provision works. You get 30 percent for the first year’s depreciation. Say you spend $100,000 on a new tractor. That 30 percent reduces its adjusted basis by $30,000, to $70,000. Then apply the normal depreciation of 33 percent, which yields an additional $23,333, for a total $53,333 reduction in the first year’s cost basis. Calculated without the 30 percent, it’s only $33,333 – a $20,000 difference in this case.
“You don’t want to overuse your depreciation,” says Todd Amen, a principal with American Truck Business Services in Denver. “Once you depreciate to zero, you’re done depreciating. You’re going to start paying taxes based on no truck expense.”
A typical depreciation schedule uses a third of the truck’s value for each of three years. For some drivers, the three-year schedule works well for depreciation and warranty, and they plan trades accordingly.
Even before this 30 percent depreciation came along, there were cases where equipment could be zeroed out within two years, Amen says. In those cases, the third year can come as a shock – not only has depreciation vanished prematurely, but its loss can bump an owner-operator into a higher tax bracket. “They don’t realize they owe $6,000 to $8,000 in taxes, and they don’t set that aside,” Amen says.
In most cases, this extra depreciation should not be an incentive to make a purchase. Or if you do buy, to close the deal before year-end; the provision covers equipment (new or used) bought after Sept. 10, 2001, and before Sept. 11, 2004.
“If you’re having a tougher year, use it,” suggests Amen, but get with your accountant and devise a plan to handle tax bills for the life of the truck. Otherwise, don’t put much stock in the guys at the truck stop who say that once you become an owner-operator, you never pay taxes again. “Maybe for a few years,” says Amen. “But at some point, everybody in America pays taxes.”