Maximizing the acquisition of a new truck

Whether you operate a single truck or a fleet of dozens, the delivery and service vehicles you own likely represent one of the biggest assets on your propane company’s balance sheet. So, when the time comes to acquire a new vehicle, the transaction deserves your full attention and careful planning. Here are some tips on maximizing the value of a vehicle acquisition.

Timing the acquisition

Don’t just buy a truck because you want something new and shiny. Make sure there is a need. Also, if you have more trucks than you do drivers, it probably is not the time to buy a new vehicle. That said, the acquisition of any vehicle should be based on a capital replacement program, which allows you to replace your vehicles before they start needing major repairs and become unreliable. By sticking to a pre-planned schedule, you can avoid last-minute decisions and surprises. In addition, the timing of a purchase is essential for tax planning purposes, particularly if you plan to take advantage of accelerated depreciation of the asset.

Maximizing depreciation

The purchase of a new truck of any type or size is a major capital expense. As such, it is eligible for depreciation. There are two basic methods to depreciate a vehicle: the straight-line method, which gives you equal deductions each year except for the first and last year; and accelerated depreciation, which provides you with larger deductions the first few years (or first year) you own the vehicle.

From an accounting perspective, depreciation is treated as an eligible deduction to your company’s earnings. However, from the perspective of financial analysis, depreciation is recognized as a non-cash expense because there is no cash disbursement associated with annual depreciation. Instead, there is only cash outflow at the time a fixed asset is acquired. Here is a very simple example of how a straight-line, non-cash expense occurs:

• On July 1, 2021, a company purchases a bobtail truck for $200,000 with cash. The bobtail is estimated to have a useful life of five years; therefore, an annual depreciation expense of $40,000 is created for the next five years.
• In 2021, the propane company will have a depreciation expense of $40,000 on the income statement and an investment of $200,000 on the cash flow statement.
• In 2022, the company will have a depreciation expense of $40,000 on the income statement and no investment recorded on the cash flow statement.

This continues until 2026 when the depreciation from the bobtail becomes $0 because it is fully depreciated.

The $40,000 depreciation expense is a non-cash item, and the capital cost is recorded only once on the cash flow statement.

Current tax law allows for accelerated depreciation of certain assets, including commercial vehicles, using IRS Section 179 deduction or bonus depreciation, which allows you to deduct all or most of the cost of a new truck in a single year. For vehicles placed in service during the 2021 tax year, the maximum Section 179 expense deduction is $1,050,000. It is worth having a discussion with your tax adviser on any benefit you may derive from a full write-off this year. But the timing of the purchase is important. If you want to take advantage of accelerated depreciation for the 2021 tax year, your new truck needs to be purchased and registered by Dec. 31, 2021.

Buying versus leasing

Most companies operating vehicle fleets own their trucks. Buying instead of leasing gives you more control over physical assets, which can be added to your balance sheet to act as collateral and help improve the value of your company. You can also customize your trucks without penalty, an important concern when adding specialized propane delivery equipment or the latest in digital communications systems.

When you purchase a vehicle, you tie up capital in an asset you know will depreciate – capital that can be used elsewhere in your business. Companies also need to consider their debt to equity (D/E) ratio. D/E is a business’s total liabilities divided by shareholder equity and is used to evaluate a company’s financial leverage.

Once the loan is paid off, you have a vehicle that is free from debt and retains some value. However, the vehicle is now several years old, probably in need of repairs, and has depreciated steeply from its purchase price. If you choose to sell a vehicle you have replaced, the money received most likely will not be taxed at capital gain rates as you would expect but instead at ordinary income rates. The IRS calls this “recapture” and is taking back the benefit it originally gave in the form of depreciation.

Leasing, on the other hand, has a lower cost of entry because you are only “buying” use of the vehicle for a specific period of time. This means you can acquire the vehicle you need without high upfront cost or the credit constraints associated with a purchase. No down payment is required, although there are lease fees, sales tax and the first month’s lease payment. The monthly payments are also lower for a leased vehicle, and they are tax deductible when paid similar to rent instead of depreciation. Of course, at the end of the lease, you have to give it back and, as they say, “get nothing” for the payments you have made.

There is another, less obvious benefit of leasing your trucks. Turning over a vehicle after a shorter period of time means having a newer model on the road more frequently, which could help to attract and retain drivers.

Summary

The acquisition of a new delivery or service vehicle is a decision that requires investigation, deliberation and a full analysis of the long-term impact on your bottom line. Making the timing of the purchase work for tax and accounting purposes will help make the most of the asset you are acquiring.

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Marty Kirshner and Joe Ciccarello are partners in the Energy Practice Group at Gray, Gray & Gray LLP, a business consulting and accounting firm that serves the propane industry. They can be reached at 781-407-0300 or powerofmore@gggllp.com.