If you are getting into the trucking business, you’ll need
to decide if you want to buy a truck or lease one. We are Accountants for the Canadian Transportation Industry and can provide your trucking outfit with bookkeeping and tax preparation services.
This post will go through some of the thought processes of why you may want to buy a tractor or why you may want to lease.
Definitions
A capital lease is a contract that allows the renter to use the truck for a designated time period (it is temporary, not indefinite. Indefinite time period is called rent.) AND is treated as if the business owns the truck as far as the accounting goes. The present value of the lease payments are greater than 90% of the truck’s market value, and the lease period is at least 75% or more of the truck’s useful life and gives an option to buy for less than the truck’s market value (bargain purchase) where the lessee gains ownership at the end of the lease.
Capital Lease Meets These Criteria:
- Set for a designated time period (as opposed to rent)
- Business treats leased equipment as if they own it
- Lease payments are greater than 90% of equipment's market value
- Lease period greater than 75% of truck's useful life
- Buyout option less than truck's market value
Benefits of leasing a semi-truck
It’s quick and easy to lease. Truck leases are essentially renting a truck for a specified period where for a fixed reoccurring fee. The truck gets leased under your business name, and your business is responsible for maintenance costs, insurance, and repairs. Sometimes your dispatch will cover these expenses, depending on your agreement with your logistics dispatch company.
You may get to keep the truck at the end of the lease, depending on the lease agreement. This is called a capital lease, which is the most common type of truck lease.
Your dispatcher may even rent you a truck, which gets you driving today.
You don’t need as much money upfront for leases. There isn’t a large down payment involved in leases (usually).
You’ll have access to a new vehicle. When you lease, you’ll most likely be leasing a new vehicle, and after the truck is paid off, it’s yours to keep.
By driving a new leased vehicle, you may be avoiding big repair and maintenance costs. High mileage trucks can be high maintenance and eat into the profits of the truck.
Some of the Cons to leasing your truck would be
You’ll be probably spending more in the long run in the form of high monthly lease payments. Payments for leasing a truck can be expected anywhere from the low $3,000’s to close to $5,000 a month, depending on the period of the lease.
There are restrictions. There might be rules that are written into the lease contract. Some lease contracts will forbid animals in the truck or have a no smoking clause.
There could be terms hidden in the lease agreement. You might come across terms and conditions in the lease contract that you didn’t understand or overlooked when signing the lease. You’ll want to read the lease agreement carefully before signing.
Why you might want to purchase a truck instead
More negotiating power. You can negotiate to buy a used semi-truck, which can help you save money in the long-run. Some truck drivers have traded other items they own for a different truck or have made deals in return for services to get a semi-truck for a deep discount.
Possibility of more savings. If you have the cash on hand to put down a large deposit, you can increase your monthly net income substantially.
You can customize your truck. When you are the owner, you aren’t limited in what you can do to the inside of your truck. Of course, it still has to pass tests to be road worthy.
The downsides to buying your own semi-truck
You have to cough up that big down payment. In most cases, you’ll have to put money down when buying a truck. If you get creative, you can avoid this. Examples would be trades or simply negotiating payment takeover of the seller.
You have money tied up in the capital expense. Selling a used semi-truck isn’t a cake walk. Be prepared to stand your ground if you know what the truck is worth. You can come across low-ballers and deal seekers.
Repairs. Some truck drivers have a lot of repair experience and some don’t diesel mechanics aren’t cheap, so be prepared to set aside funds for repairs.
Conclusion
There are benefits and cons to both owning and leasing a semi-truck. If you’re a savvy buyer with cash in the bank, you may want to buy a truck. If you want to get into a new truck quickly, leasing is definitely the way to go.
What do you think is best, leasing or buying? Let us know.
If you have any trucking business accounting or tax needs, please give us a call. We are accountants specializing in the transportation industry. We can work remotely with clients all over Canada.
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