By John Valle, CPA | Principal, Tax
The tax reform changes under the Tax Cuts and Jobs Act brought the most extensive overhaul of the tax system in more than 30 years. These changes impact nearly every industry, with trucking and transportation included. One of the biggest questions for carriers and fleet owners is whether to buy or lease trucks under the new tax laws. Let’s explore this topic in detail to help apply the latest tax changes to this important question.
Depreciation Changes Under the Tax Cuts and Jobs Act:
Section 168k – Bonus Depreciation
- 2018 – 100% bonus depreciation is allowed for new and used assets with a class life of 20 years or less
Section 179 – Expensing
- 2018 – Increased to $1,000,000 of asset expensing
So, what exactly does this mean for trucking companies? Trucking companies will be eligible to write off 100% depreciation of any new or used truck purchases beginning after January 1, 2018.
Buying vs. Leasing
If the trucks are purchased:
The major benefit of buying is the truck is eligible for full depreciation expensing in the year of the purchase, even if it’s financed with a note.
If trucks are leased:
The ability to depreciate the asset depends on what type of lease agreement that the company has entered into. There are two types of leases – capital and operating lease:
- Capital lease:
- The title passes to the lessee at the end of the lease term
- Contains a bargain purchase option at the end (example: $1 buyout)
- Essentially a purchase with financing even though it’s referred to as a “lease”
- The truck is treated as an asset, and the lease is considered a liability on the balance sheet
- Bonus depreciation and Section 179 eligible – this translates to a 100% write-off
- Operating lease:
- Lease payments are required during the lease term
- At the end of the lease, the lessee has the option to turn the truck in or buy it for residual value
- Payment is treated as an operating expense to the company
- No depreciation benefits allowed since the company doesn’t own the truck
What is the best option for fleet or truck owners? The answer is dependent on many factors affecting the business, including the cash flow of the business and the tax structure. One company may opt for a lower payment, if available, over the tax considerations. Another company may have significant tax liabilities and is looking for a way to minimize the taxes. Working with a CPA and business advisor that specializes in transportation ensures reviewing all the options for truck acquisition to fit your growing business needs.
If you’re planning to acquire additional trucks for your fleet, contact me today to review the best plan for your needs.