TRUCK & TRAILER GUIDE- LEASING VS BUYING: A New Lease on Life

Buying a new truck for a landscape business isn’t always easy. Contractors must take into account several factors, including how the truck will be used, what materials the vehicle will haul, weight distribution and frequency of use – to name a few. Once the right truck is selected, contractors then have to decide whether they’re going to lease or buy their new vehicle.

There are pros and cons to leasing and buying, which is why financial consultants and landscape contractors say the decision is usually based on past experience and usage.

BOOKENDS. Roughly half of commercial customers lease their trucks, according to Tim Vella, commercial marketing specialist, Ford Credit, Dearborn, Mich. Leasing is attractive to landscape contractors because they generally have a lower or no down payment and no security deposit, and they get a new truck at the end without paying the depreciation of the vehicle, says Heath Wood, sales manager, Middle Georgia Freightliner, Macon, Ga.

Also, by continually rolling over into new trucks, contractors can minimize maintenance issues they may have with older trucks they purchased, Wood notes. Some commercial leases include free maintenance programs, advice and consultations on the truck’s equipment and engineering, preventative maintenance schedules, quarterly fleet evaluation reports and emergency roadside assistance, Villa says.

That’s why the Belknap Landscape Co., Gliford, N.H., leases its maintenance and light-duty dump trucks, says Belknap Director of Operations Andrew Morse. "In four years, you get a brand new vehicle that is going to pull a trailer everyday and plows all winter for four straight years, and after those four years, it’s tired so you don’t have to worry about sinking money into transmissions and front ends."

There are two types of leases contractors usually choose from – an open-ended or closed-ended lease. In an open-ended lease, a contractor’s responsible for the residual value, which is its projected value at the end of the lease. The contractor may purchase or sell the truck at the end of the lease. If the truck is sold for more than the residual, the contractor keeps the balance. If the truck sells for less, the contractor pays the difference.

With the open-ended lease, there are no mileage restrictions or wear-and-tear penalties. When considering an open-ended lease, the dealer’s financial department will work with the contractor to determine the residual value based on the truck’s usage requirements. The residual is usually higher on open-ended leases, resulting in lower payments, Vella explains.

On a $30,000 truck, the residual may range from $0 to $5,000, according to Tony Pisciotta, general manager of Atlanta-based Kelly Commercial Truck Center. Open-ended leases usually last five years, compared with three or four years on a closed-ended lease, Pisciotta says. Open-ended leases also are popular with landscape contractors because they tend to put their trucks through heavy wear and tear, according to Vella. "Generally landscape vehicles go on an open-ended lease unless they’re used for sales where there’s not heavy wear or use," Vella says.

On closed-ended leases the financial department is responsible for the residual value, but on the lease maturity date the contractor is held accountable for mileage limitations and the truck’s condition. Dealers should ask contractors how many miles they typically drive and their hauling needs to determine the right type of lease, Vella says.

Pisciotta says most of his commercial clients choose a closed-ended lease because after just three or four years, a contractor can roll into a new truck instead of purchasing or selling the truck at the end.

BYPASS LEASES. Leasing is not for everyone. Contractors who rack up a lot of miles or plan on owning their trucks for more than four or five years may want to consider buying. Heads Up Landscape Contractors, Albuquerque, N.M., purchases all its trucks because the company can usually get a better overall interest rate by taking advantage of 0-percent financing promotions, according to Vice President Dave Daniell.

"We have leased in the past and just found that we ended up probably paying, in total, more for leasing than if we had just bought it," Daniell says. "But at the time we were leasing as a way to keep debt off our balance sheet – it was based more on how our business looked to the banks."

Daniell adds that the company’s balance sheet "got considerably better" in the last three or four years by purchasing instead of leasing, estimating his company saved between $500 and $1,000 dollars per truck this way.

Although Belknap leases most of its trucks, the company does purchase its light-duty pickup and construction trucks. The light-duty pickup trucks are reserved for managers who drive more miles than the leases typically allow, Morse says. "The construction vehicles don’t put many miles on at all, so it’d be stupid to lease because you’ll never come close to using the miles that they allot to you," Morse explains.

Morse adds that the construction trucks last five to 10 years because of the low mileage. Morse estimates lease payments at $350 to $400 per month and purchase payments at $400 to $450 per month. Morse says the company took advantage of no money down and 0-percent interest rates on its purchases.

Even if mileage isn’t a consideration with an open-ended lease, landscape contractors need to remember that if the truck’s actual value is lower than the projected value, the contractor pays the difference. "Anybody who leases right now is going to cap that mileage at 25,000 miles per year unless you want to do a commercial lease, which buys the vehicle way down," says Mark Perleberg, lead automotive expert for NADAguides.com (National Automobile Dealers Association), Costa Mesa, Calif. Contractors must also carry higher insurance limits on leases than on purchases, according to Perleberg. Liability charges can increase by 25 to 30 percent on leases, Perleberg estimates.

"One of the best tips for leasing is that, as a rule, work trucks or vans aren’t going to be in that stellar condition when they’re done," Perleberg says. "Look at what you have in your inventory now. If you know you’re going to be hard on the vehicle, that’s one thing to consider. When people make mistakes on leasing it’s normally because they don’t factor in their driving habits."

THE TAXMAN. Payments on work trucks are also recognized as business expenses when leasing and purchasing. Deductions on commercial purchases usually work this way: When contractors buy trucks they expect to last several years, they can deduct a small portion of the truck’s depreciation each year over a period of time, according to Steve Greenway, commercial tax manager, GE Commercial Finance, Fleet Services.

The Internal Revenue Service (IRS) uses a formula to calculate how assets will depreciate during this time period, which is usually five years on trucks. Contractors would then deduct a larger amount during the first couple years and less throughout the remaining two or three years, Greenway says. For instance, on a $20,000 truck the IRS will allow a contractor to deduct $12,000 the first year, $3,200 the second year, $1,920 the third year, $1,152 in each of the fourth and fifth years and the final $576 in the sixth year, if the truck is in service that long.

"What happens is you take a bigger write-off the first year than the truck actually cost you," Greenway says. "So that helps you to shelter income for the first couple years and you pay less income tax so you’ve got more money this year. Now, you’ve got to pay it on the backend, but you’ve got the use of the money now, and that can help you grow your business."

This method is more advantageous for larger landscape companies that are looking to grow their businesses because they’re more likely to have high enough income for the larger write-offs, Greenway explains. "They’ve got money coming in, they’re paying a significant amount of income tax, so this would probably be of more benefit to an established company," he says.

Leased trucks are also tax deductible, but the contractor leasing the truck writes off each payment as a business expense rather than deducting larger amounts associated with accelerated depreciation on purchases. Leases make more sense than purchasing for newer landscape companies, Greenway explains. "The cash flow is better because you didn’t have to come up with the $20,000 in the first place to buy the asset," he says. "So I think there’s some advantages to the start-up company just from a cash flow perspective."

Contractors who purchase should also remember that they will pay additional taxes after they sell their trucks, Perleberg says, adding, "the advantage of a purchase is, you can depreciate the inventory but then when you go to resell it you will have a tax base on the other side."