When acquiring a new truck for your fleet the question of lease vs. purchase is an important one. Trends are shifting towards full-service leasing. This is our first installment of a 3-part series on the growing advantages of a lease program and how NationaLease San Diego can facilitate that.
Operating a commercial truck fleet has always been challenging, and it’s getting more so with advancements in vehicle technology. Today’s commercial trucks are increasingly filled with advanced digitally connected engines, emissions control systems and onboard technologies. Soon we will have more trucks powered by electricity, hydrogen and natural gas.
With all these choices, fleet owners are looking at various operating models and evaluating the benefits of leased, owned or blended fleets to meet their business needs. Some of the initial questions that come to mind for any transportation-focused businesses are: lease vs. buy/own? Which is the most cost-effective approach to asset acquisition and management? What variables need to be considered?
On average, large businesses lease approximately 35% of their fleets, according to a recent Forbes Insights survey of more than 400 executives. But big changes in both tax rules and the nature of logistics, supply chain, and transportation are tipping the scales further in favor of leasing, meaning that figure is set to increase.
One of the key benefits of ownership is the ability to write off interest expense. But the Tax Cuts and Job Reform Act (TCJA) reduces the corporate tax rate from 35% to 21%, which means that most businesses will have more cash flow available to acquire more vehicles. Yet by the same token, the value of interest expense write-offs will be diminished.
Another advantage of ownership is the right to claim depreciation, and indeed the TCJA enables 100% depreciation of new and “new to you” used assets. But again, the value of this benefit is diminished by a lower tax rate.
Finally, the TCJA introduces a cap or limit on interest expense deductions. That is, write-offs are limited to a total of 30% of EBITDA, which means that certain highly leveraged organizations, often the sort that are experiencing high growth, will be unable to access the full value of any write-offs. This limitation will become even more restrictive post-fiscal year 2022 when EBITDA is replaced by EBIT.
All of this introduces new math to any lease vs purchase calculations. And as a rule of thumb, the longer the duration, the more attractive leasing becomes. Contracts with terms of five or more years will tend to strongly favor leasing.
Changes in technology have increased dramatically in the last several years. Today’s trucks are equipped with a vast array of technologies from telematics devices to sophisticated safety features. Increasingly, fleet owners will see the advantages of incorporating electric or natural gas-powered trucks and delivery vehicles into their fleet mix. Innovations and advances are occurring with every model change. Individual fleet operators, it only stands to reason, will find it increasingly difficult to keep up with the maintenance of so many advanced systems as well as the shortage of trained technicians required to maintain current and emerging vehicles. With a full-service lease program from NationaLease San Diego, the maintenance is part of the package.
Stay tuned for the next installment of the advantages to leasing. If you have any questions, feel free to give us a call.