Buying and Leasing and Taxes, Oh My!

If you own a transportation business, you know that determining how to acquire your fleet is a huge decision. New equipment can certainly help you edge ahead of your competition, and the basic options of buying and leasing have fairly clear general pros and cons. Cost is often a major determining factor in transportation business owners’ decisions in this area—and understandably so. When it comes to taxes, though, the implications can greatly affect the long-term costs associated with how you choose to acquire or improve your fleet.

Purchasing Your Fleet With or Without a Loan

When you purchase vehicles, you can treat them as assets. If you take out a loan for them, the loan payments are considered liabilities. You can enter any equipment that you purchase on the balance sheet right away, which can be helpful when tax time comes. Depending on the structure of your company, you may be able to deduct most of the cost of large non-passenger trucks in the year of purchase. (See Section 179 for details.)

Leasing Your Fleet with a Capital Lease

If you lease your fleet with a capital lease, you’ll have a long-term lease agreement. At the end of the lease term, you’ll be given the chance to purchase the equipment at a highly discounted price. This scenario allows you as a business owner to treat leased equipment as assets, allowing them to be depreciated on the books. Since the lease counts as a debt, the interest payments are deductible.

Leasing Your Fleet with an Operating Lease

With an operating lease, you’ll deal with a shorter term commitment. The brief time frame allows business owners to avoid assuming risks associated with owning the equipment; at the same time, they don’t get to enjoy associated benefits, either. Often, this kind of lease is used for equipment expected to become irrelevant or outdated in a short amount of time. Operating lease payments are deductible, but since the equipment is not able to be treated as an asset, depreciation is not.

Of course, tax issues aren’t the only considerations when you’re looking at buying or leasing your fleet. While purchasing vehicles reduces taxable income, it also requires you to give up valuable business cash flow. Leases let you avoid much of an initial investment, but the monthly costs can be hard to swallow. Purchasing an entire fleet through acquiring an existing transportation business for sale may be the way for you to go.

In order to reduce your risks while increasing the potential rewards, you’ll want to weigh your options very carefully. If you need guidance in making this or other important decisions regarding your transportation business, you can discuss your options with a transportation industry business broker at The Tenney Group.