January 31, 2013
By Jason Cannon
A small piece of the bridge over last year’s pending fiscal cliff included a depreciation allowance designed to spur capital investments and upgrades.
“Bonus Depreciation” was extended through the end of 2013, affording tax advantages to businesses that purchase new equipment.
Typically, a company making a qualifying equipment purchase could write off 20 percent of the cost. However, under the allowance, businesses will be able to write off 50 percent of the purchase.
While this could sound like a boon for fleets and their and expenditure plans, one industry expert isn’t optimistic the incentive will lead to a measurable spike in truck sales.
“You’ve still got this cloud hanging over the other 50 percent,” Stu MacKay, president of MacKay and Company, says of the share fleets would have to expense amid economic uncertainties. “I think there are companies that, if it fits their trade cycle and operating circumstances, they will probably take advantage of it.”
All businesses qualify for the bonus depreciation deductions, but there are some instances where it is not advantageous.
Under Section 179 of the Internal Revenue Code, businesses may expense, or immediately deduct, the first $25,000 of investments in machinery and equipment. The amount of qualifying investment eligible for the deduction decreases dollar-for-dollar for amounts in excess of $200,000. A business investing more than $225,000 will receive no immediate deduction.
However, Lisa DeCaprio, MST, tax supervisor with BlumShapiro says there is an exception beginning with Class 4 trucks, noting vehicles with a GVW greater than 14,000 pounds are not subject to luxury auto limitations or Section 179 limitations.
Dennis Boswinkle, sales manager for La Vergne, Tenn.’s Nacarato Volvo Truck dealership, says his sales force uses the potential for tax credits as his team nears the close of a sale, “reminding the customer to check with his tax accountant first to make sure it is a fit.”
Chris Marsh, sales manager for Boston, Mass.-based Tri-state Truck Center, says Bonus Depreciation isn’t a large part of his dealership’s marketing strategy, but it is something that is discussed with fleet customers prior to purchase.
Understanding how deprecation works, and helping fleet customers use that to their advantage could play a large part to successful sales calls.
A key to making bonus depreciation work for your fleet contacts is ensuring vehicles are purchased and placed in service in 2013. Equipment bought and stored for use at a later date is disallowed, assuming Bonus Depreciation is not extended or is not amended. Too, since Bonus Depreciation is automatically applied, purchasers who plan to delay putting the equipment in service to a later date will have to opt-out.
Another key, according to Rob Pearson, CPA with Alabama-based Mason and Gardner CPAs, LLC, is understanding that opting out may be a good idea for a select few clients.
“If (the customer) anticipates an increase in income, so much so that (their) tax rate may change, there’s no advantage to Bonus Depreciation unless you continue to invest that increase into new equipment,” he says.
Also, Pearson notes that Bonus Depreciation doesn’t expedite the normal depreciation cycle of the equipment. It simply incentivizes the first year by front-loading the depreciation rate.
“If your depreciation cycle is 5 years, by the end of that fifth year — when the equipment is fully depreciated — there won’t be any net difference in the amount of depreciation,” he says.
Pearson adds the key to making Bonus Depreciation work as part of the sale is encouraging your customers make wise use of the capital saved in year one.
“The net (advantage) is if you can invest that money over the next several years in something that pays a good interest rate or a dividend – or invest it another part of the business that can make you money – over the life of the depreciation cycle,” he says.
Even in what MacKay cites as unlikely circumstances of a mad dash to the dealerships, it’s not likely a rise in production would come with the demand.
“We’ve been through so many pre-buy cycles driven by the fear of the unknown, I think truck manufactures aren’t going to ramp up then ramp back down,” he says. “If you took a track across all the highs and lows (of truck sales), even if the economy started to heat up, a lot of manufactures will be cautious in ramping up production.”
The reluctance to ramp up, MacKay says, also is driven by a spotty forecast of need. Advancements in technology and quality have painted many manufacturers into a corner by building equipment that works better and lasts longer.
“Productivity of new trucks in service is dramatically better than it was 10, 20 or 30 years ago,” he says. “We’re building making better products and they’re being much more effectively used. We’re victims of our own success.”
MacKay also cited a growing preference to overhauling major components — or replacing them all together with remanufactured parts — as another driver in sluggish new truck sales.