“There’s a misconception that fleets must purchase their trucks in order to take advantage of the tax savings available from the federal legislation passed late last year. But that’s not the case.” –Olen Hunter, national sales director, Paccar Leasing
One of the drivers behind the big spike in truck orders and sales we’ve been witnessing in 2011 stems from a “bonus depreciation” addendum in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
That rule extended a 100% bonus depreciation provision from Sept. 8, 2010, through the end of 2011, according to the U.S. Internal Revenue Service. However, once we reach 2012, “bonus depreciation” reverts back to 50% for all qualifying assets placed into service through Dec. 31, 2012.
In short, truckers that need wheels realized they could reap some pretty significant tax savings if they bought equipment and placed it into service by the end of 2011. Indeed, a lot of businesses benefited from this provision, as well, if they needed to buy physical assets for their operation.
[In an interview below, Cindy Tweten, a CPA and tax manager, talked about how this “bonus depreciation” addendum became part of an effort to spur U.S. economic growth.]
Of course, by now, order boards are almost filled up and even if truckers could get a slot for new equipment, many worry they might be able to get it into operation in time to qualify for this tax break.
However, Olen Hunter, national sales director for Paccar Leasing (PacLease), noted recently that fleets can lease equipment and still get the benefit of bonus depreciation – largely because the leasing companies can factor it into their agreements.
“There’s a misconception that truck fleets must purchase their trucks in order to take advantage of the tax savings available from the federal legislation passed late last year,” he explained. “But that’s not the case since we incorporated the reduction into its lease program by reducing its lease rates. This allows customers to take full advantage of the bonus depreciation without all the potential downsides.”
Hunter – who also strongly recommends fleets talk to a tax professional to make doubly sure they comply with the rules – noted that for each truck that a company leases using bonus depreciation, it can save nearly $11,000 over the typical life of a 5-year lease.
Now, how do such savings occur, you ask? First, assuming a tax rate of 34% and an interest rate of 6%, a company purchasing a Class 8 truck that costs $125,000 would pay nearly $20,000 in interest over the life of the loan and receive a tax depreciation benefit of about $42,500, all of it in the first year, according to Hunter.
At the end of the loan, after selling the truck, it would cost about $106,700, which includes other tax benefits, estimated proceeds from the sale, income taxes on the proceeds from the sale and projected preventive maintenance expenses, he said.
If the company instead chose leasing, the net cash outlay would, after tax, would be approximately $10,000 less than the cost of ownership, Hunter pointed out.
“However, before deciding whether to buy or lease trucks and employ the bonus depreciation, companies should conduct what’s called a net present value analysis of the lease or loan payment stream,” Hunter said. “This allows them to make comparisons between financing alternatives, reviewing the payments in today’s dollar value.”
But time is of the essence, he stressed.
“OEM build schedules are filling up quickly,” Hunter said. “Now, we have pre-arranged build slots, but since the build slots are filling, companies shouldn’t wait until the third or fourth quarter to place orders, particularly for popular aerodynamic and hybrid diesel-electric models. If they wait until the third or fourth quarter, there may not be enough time for the trucks to be manufactured and delivered by Dec. 31.”