Used Trucks ~ Cash vs. Financing

Well, I agree in principal, but it's actually more like this, which is not a perfect example, but let's forget the 30% tax rate issue for a moment as the loan figures larger in the business expense model. Don't count on being in a 30% tax bracket, because you can easily avoid this. If your accountant is putting you there, he/she needs to be replaced, or you need to keep track of your receipts better.

Simply consider the interest rate plus principal on the loan as an ordinary business expense reducing your profit margin, which it is. You are entitled to write off the entire loan (principle plus interest) on a vehicle as a business expense, and you can do it over a period of years. You want to expense it over time because this allows you to be relieved of tax obligations over a number of years. I recommend depreciating it over a period of 5 or 6 years maximum, because you should plan to own the truck outright within that period of time regardless of what loan terms the bank gives you. You don't want to be in a perpetual debt situation but come out of the loan with some invested value in the truck, ideally enough for a sizable down payment of the next rig.

So, at ($100,000 per year total broker receipts * 5= $500,000) minus ($150,000 loan plus interest=$250,000)= $250,000/5=$50,000 per year average earnings.

Th $100,000 per year broker receipts is probably too low, but one can easily see that the taxable income will easily zero out on an annual basis given the huge number of other possible expenses and tax deductions, such as fuel, maintenance, the transportation per diem deduction, cell phone costs, home mortgage interest deduction, etc.

In fact, on paper yours is a business where expenses equal receipts, but this not necessarily a failing business as far as you are concerned because you benefit by many expenses. Lots of corporations do this. The IRS will also allow you to do this forever because it's easy to demonstrate that your trucking business isn't just a "hobby". In other words, the 3 out of 5 year rule for losing businesses doesn't apply to truckers. The government collects it's taxes through IFTA, HUT, IRP, etc., which you can expense, making it unlikely you will pay much personal income taxes.

On the other hand, the loan itself is a financial burden regardless of taxes, and the truck is still depreciated over a 5 to 6 year period. If you bought the truck in cash: ($100,000 per year total receipts * 5= $500,000) minus ($150,000 truck price)= $350,000 per year/5=$70,000 per year. $20,000 more per year than without the loan, and in reality it may be more than this given loan interest rate accumulation.

Still taking away the additional expenses, computers, cell phone, transportation per diem, normal house mortgage interest deducton, etc. that larger $70,000 still reduces to put the trucker in a tax bracket well below 30%.

If you buy the used truck at $50,000 in cash, then those 5 years of receipts will leave you richer, even if the ride is not so luxurious: $90,000 per year. With an older truck, the repairs could easily be a lot higher than the newer truck, but probably not by more than $20,000 per year, leaving you in the same situation as if you had bought the new truck in cash. The primary advantage of the new truck over the used truck would be that after 5 or 6 years, you'd have more of a truck to sell off for down payment on the next.

If you buy the used truck on a loan, then your situation could still be over a 5 year period margainly better than taking on the huge loan: ($100,000 * 5= $500,000) minus (($50,000 + $25,000 interest) + ($20,000 * 5=$100,000))=$325,000/5=$65,000 p/yr income. This is the business model for a lot of immigrants and poorly capitalized white guys, the main problem being that the combination of a loan payment and expensive repair in any given month could put the trucker out of business or out of service by DOT. But, at least the risk of owning an expensive new truck isn't there.

 

Incidentally, contrary to popular belief, ECM and CARB emission equipment is designed to improve engine life and fuel economy (without loss of power), and will live longer than old equipment before major breakdown. DO NOT become nostalgic about old engines, heavy chrome ornamentation, and so on.

Stockton Hauler I have a question and I need some sources on this evidence. New emissions is going to bring better fuel economy and engine life? Horse pucky. pre 2004 engines had far less major work than post 2004, and older engines had better fuel economy, and less components to go wrong. I know as a diesel mechanic I see what the ecm tells, it counts how many gallons of fuel used to how many miles, and % of idle time, new engines suck. More crap to break down, egr running exhaust and high temps back into the engine to be burned again, dpf filters making exhaust hotter and more components to break, and this extends engine life and better fuel mileage, I dont think so, but I am just a dumb old country boy mechanic.

 

Well, I said that it was "designed" to improve fuel economy and reduce emissions. It such is far from perfect. Obviously though the, pre-2004 engines certainly were not as fuel efficient (assuming same engine size), they were dirty at the smokestack, putting out invisible NOX and unburnt fuel gases in abundance. The early EGR, which was well known to engineers and fully tested in the lab and on demonstration vehicles long before it reached the mass market, still has some huge problems in practice.

But, there's no going back to the good old days. In addition to fuel economy concerns from diminishing supplies/increasing global demand for diesel, there's the demand for cleaner air. Just like litter laws forbidding throwing trash out the window as if it didn't matter, or dumping chemicals into streams and bays, dumping gases and particulate junk into the air just isn't acceptable anymore.

One good thing is that while the engines are somewhat more complex structurally, they are controlled by an ECM that can also diagnose most problems. The days of tinkering to resolve engine problems will be replaced by a solid understanding of engine peformance through the ECM diagnostic output. There is some hard learning about what this all means, so young guys wanting to become mechanics are advised to take technical coursework at the diesel mechanics school, rather than simply learn on the job. A strong theorectical background is needed to troubleshoot ECM problems.

 

Rollin Coal has a point however if you can pay cash up front you'll end up paying less over time cause when u add on all the interest you pay on a load in ends up being heaps more, but then if you can claim all you interest payments as tax deductions then that changes things abit so yes as some have indicated a registered practicing accountant could give you the best advice on that one.














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All it changes is the fact that you're sending the bank money (payments+interest) in order to get a minimal "tax writeoff" that will never be equal to or greater than the extra interest money you sent to the bank. I'd rather have it paid for and let the government confiscate their cut. It'll always be cheaper that way and a lot simpler. There's more than enough headaches in this business already. Why complicate things by paying an accountant to advise you with overanalzed theories and formulas trying to help you justify in your mind spending money you don't have on something you can't afford?

 

Very nice information and I find alot of since on what you said.
thanks for all that info.