Expanding by contracting?

In today's frail economy, many fleets are contracting by shrinking the number of drivers they deal with. At the same time, others are expanding by contracting that is, contracting with more owner-operators. A number of factors make turning to owner-operators more appealing now than a few years ago. First, if your markets are volatile, you may prefer to serve a surge of customers with temporary help

In today's frail economy, many fleets are contracting by shrinking the number of drivers they deal with. At the same time, others are expanding by contracting — that is, contracting with more owner-operators.

A number of factors make turning to owner-operators more appealing now than a few years ago. First, if your markets are volatile, you may prefer to serve a surge of customers with temporary help rather than exposing yourself to the risk of buying equipment and hiring employee drivers who may be idle in the next downturn.

Second, you may find a much better choice of owner-operators now than in the tight labor market of a few years ago. Third, you may soon find that they can buy new equipment on more favorable terms than you can, thanks to the tax legislation making its way through Congress. Under current law, if you buy no more than $200,000 of new equipment per year, you can expense, or immediately deduct, the first $25,000. In his budget last February, President Bush proposed to triple the $25,000 figure to $75,000.

The House of Representatives passed a bill in early May that would raise that to $100,000 — enough to buy a decent sleeper cab, mud flaps included. The Senate Finance Committee sent to a bill to the Senate floor that stuck with the President's figure, so a change of at least that magnitude seems assured of getting through a House-Senate conference and into law.

In addition, the cutoff point for the cumulative total investment in a year beyond which the expensing benefit phases out would rise from the current $200,000 to $325,000 (President's plan and Senate Finance bill) or $400,000 (House bill). Both the $75,000/$100,000 and $325,000/$400,000 figures would apply to taxable years beginning in 2003, and both numbers would be indexed for inflation in future years.

These changes mean that an owner-operator or a business whose only equipment purchases consist of a few tractors a year, for example, will be able to deduct the entire cost in the first year. In contrast, a larger fleet would have to continue depreciating tractors over three years, and straight trucks and trailers over five years. As a result, you may now be able to find more owner-operators who have new equipment.

Historically, would-be owner-operators often leased their truck from a carrier until they had accumulated enough to buy the vehicle. But this change in law, combined with interest rates that are at 40-yr. lows for good credit risks, may make it more attractive for you to lend your reliable owner-operators the money to buy their tractors new.

Larger purchasers may get something out of the tax bill, too. The House version of the bill would let any business deduct 50% of the cost of new equipment purchased after May 5, 2003 and before 2006. That's up from the 30% limit on “bonus depreciation” as Congress called it when enacting it as part of last year's “stimulus” law. The 30% expensing applies to equipment purchased from September 11, 2001, to September 10, 2004. There's no limit on the size of business or total amount of equipment purchased.

The bottom line: The choice of using employees or owner-operators always requires weighing a number of factors. For now, several factors seem to have shifted in favor of contracting your employee count by contracting out the driving duties to owner-operators. But make sure you understand the criteria for properly treating a driver as an independent contractor. If the Internal Revenue Service finds you misclassified workers who should have been considered employees, the only contracting you'll do is in your bank balance.

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