Is it time to buy a bobtail?

August 9, 2019 By and    

There are many things to consider when deciding to buy a new (or used) bobtail: Current and projected financial position; age of current fleet; maintenance, repair and fuel costs; company image; opportunity cost; and tax implications should all be considered.

From a financial standpoint, can your company afford to buy a bobtail? This part of decision-making was referenced in April’s “In the Know.” Items such as projected cash flows, current debt structure and assets on hand should be considered in capital purchase decisions.

A key reason to make the investment, outside the company’s financial position, is opportunity. Opportunity cost is the loss of potential gain when a different decision is made. Say a retailer decides to run an older bobtail in the middle of winter, and it breaks down. Unable to make deliveries, the company would lose revenue and may incur unhappy customers. If that company purchased a new bobtail, the truck theoretically wouldn’t have broken down, resulting in the company’s ability to capture that revenue.

Tax planning offers another opportunity. A retailer can take advantage of certain sections of the tax code during financial planning. First, Section 179 allows the business owner/taxpayer to deduct the cost of property and equipment placed into service (e.g., bobtails, bulk storage, software, consumer tanks). This deduction was increased to $1.0 million from $500,000 as part of the 2017 Tax Cuts and Jobs Act. There is a small catch in that the credit phases out, but the limit increased from $2 million to $2.5 million. In addition, there is a limit to expensing the Section 179 depreciation. The company can’t use the 179 expense to create a loss.

The second and possibly more advantageous part of the tax code is “bonus” depreciation. This allows a business to immediately expense, through depreciation, the purchase price of certain assets. As part of the Tax Cuts and Jobs Act, this bonus depreciation allows a company to depreciate 100 percent of an asset purchased. Prior to the tax code update, legislation only allowed 50 percent to be expensed in the year of purchase. Note the bonus depreciation deduction percentage decreases over time starting in 2023. From a pure tax perspective, the company would theoretically save its tax rate multiplied by the value of the asset. For instance, a company with a 21 percent tax rate would save $21,000 in taxes with the purchase of a $100,000 asset.

Another item to consider is the age of the fleet. This can play a major role in future cash flows. For example, when running a newer fleet, your repair and maintenance expense lines should be less than those of a retailer running a much older fleet. A newer truck may also get better miles per gallon, reducing fuel expenses.

Moreover, an old, rusted bobtail doesn’t portray the best company image. Customers may not say so, but worn down equipment could make them question a retailer’s ability to take care of their needs.

Realistically, retailers should not look at just one of the above items, but a combination of all, to make sound, long-term business decisions. Start by asking if the new purchase is financially viable. Consider the opportunity costs, the financial outlay of cash and your tax situation at the end of the year when deciding whether to purchase new equipment.

Note this does not necessarily mean you should wait until the end of the year to make a decision. Hopefully, a retailer would have an idea what the year should look like in the months leading up to the end of the fiscal year. Retailers need to continually refer to their annual budget and compare their actual income against budget.

Repairs, maintenance, fuel expense and company image all affect the cash flows of the business. Looking at all of the factors provides the information needed to determine whether buying or postponing equipment purchases this year makes sound financial sense.

Propane ResourcesJeff Thompson is a supply and risk management expert and Cooper Wilburn is a consultant.

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