Depreciation appreciation

TAKE MY MONEY, PLEASE!
Truck makers at the Mid-America Trucking Show in March talked as if they soon would turn away business because production slots for trucks with pre-2007 engines would be completely filled.

Overdrive recently asked whether owner-operators still can order one of these hot commodities this summer. The answer: Probably.

“Dealers have placed stock orders to secure production slots during the year that can be converted into customer orders for delivery in 2006,” says Volvo spokesman Jim McNamara.

Most truck makers say essentially the same thing, though International cautions, “We expect to be sold out of 2006 production by late June/early July.”

Some owner-operators, less than eager to be the first kid on the block with a 2007 engine, are making plans to avoid that distinction. Should you choose to trade this year, don’t rationalize a exspensive purchase by combining’07 heebie-jeebies with some notion that depreciation will wipe out your next income tax bill. While there is a provision, Section 179, that can accelerate accelerated depreciation, it’s no magic bullet, and it’s not for everyone.

premature or excessively expensive purchase by combining ’07 heebie-jeebies with some notion that depreciation will wipe out your next income tax bill. While there is a provision, Section 179, that can quicken depreciation, it’s no magic bullet, and it’s not for everyone.

“You’ve got owner-operators saying they made all kinds of money and didn’t pay any tax,” says Kevin Rutherford, head of the Orlando, Fla., owner-operator financial services firm The Alliance. “There’s something wrong with that statement.”

There are two basic methods for depreciation, says Perry Wiseman of Truckers Accounting Service in Omaha, Neb.:

STRAIGHT LINE. This is an evenly paced three-year deduction that’s spread over four tax years: year one, 17 percent; years two and three, 33 percent each; year four, 17 percent.

ACCELERATED. This uses up 77 percent of the equipment’s value in the first two years, 23 percent in the final two.

Section 179 allows you to supplement either method. You can deduct in the first year as much as $108,000 (adjusted from $105,000 for tax year 2005).

“I like to use the straight line method and take a little bit extra the first year to come up to 33 percent, so there are three good years of depreciation,” Wiseman says.

At the extreme, some owner-operators don’t bother to save or to make estimated quarterly taxes, then milk Section 179 to catch up. “A lot of times that comes back to bite them, especially if they keep the truck past three or four years,” Wiseman says. “The mentality is worry about today, today, and worry about tomorrow, tomorrow.”

Rutherford offers an aggressive and smart alternative, but only to clients with a full tank of financial self-discipline: Use Section 179 to zero out tax bills as long as possible, often only two years, while diligently saving 8 percent of gross revenue – what he figures income taxes cost when averaged over many years. That way you’re never short when the bill’s finally due, but in the meantime, thousands of dollars are earning interest or dividends before going to Uncle Sam.

The Business Manual for Owner-Operators
Overdrive editors and ATBS present the industry’s best manual for prospective and committed owner-operators. You’ll find exceptional depth on many issues in the 2021 edition of Partners in Business.
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