Tax Tips
Financing your equipment

By Howard Abrams, PBS Tax & Bookkeeping

Q. I’m an owner-operator looking to acquire another truck to expand my business. Though the economy seems to be improving, I understand that obtaining a bank loan is a nightmare. How should I best approach financing the new rig?

A. The most important aspect of buying a truck is to first determine how much money you have available for a down payment. The larger the down payment, the easier it is to obtain financing since the lender is taking on less risk by having a smaller loan-to-value ratio as security. Once you know the amount of your down payment, you can shop the loan.

However, we prefer you have the lowest down payment possible. Find out the best interest rate and make sure you’re budgeted for the monthly payment. Following are common financing sources:

  • Dealers – Typically the dealer where you are buying the truck will provide financing. Be positive you know the interest rate they are using.
  • Banks – Some banks are business oriented and will lend on equipment. Some will not. Check your bank first. If you find your bank is not a business-oriented bank, consider changing banks.
  • Commercial lending institutions – Look for companies that cater to the trucking industry. You may pay a higher interest rate using these companies.
  • The motor carrier – If you are purchasing through a motor carrier, they will usually provide a truck purchase program. Beware of lease-purchase programs – and before you even think about doing this, call OOIDA’s Business Services Department.
  • Credit unions – Always a source of good financing.

All of the above are good sources for financing a truck. However, you need to shop around, ask questions, and determine the best interest rate available. Remember, it’s possible to negotiate an interest rate lower than what you have been offered.

You should have, at a minimum, a current financial statement, a copy of your last two years of tax returns, and a business plan.

Q. What is your opinion of leasing the equipment versus buying?

A. If you are purchasing with a large down payment, usually this results in a lower monthly payment. If you pay a lower down payment, then usually you will be charged a higher interest rate and a higher monthly payment.

If you feel you want to always drive a newer truck, you can change equipment every three or four years and always have lease payments. Certainly, buying and maintaining equipment you own is more economical than leasing. Ultimately, replacing the equipment you own is more difficult than just obtaining a new lease. But, again, owning is ultimately more economical.

Q. Should I pay cash for my new truck?

A. The short answer is no. If you are fortunate enough to have the cash available, you should be able to put it to better use elsewhere. You would be investing in an asset that depreciates in value. Not a good idea.

We think a minimum down payment is in your best interest, as the government will help you pay the loan by allowing you to deduct the interest, thus resulting in tax savings. Always consult your tax and financial advisor. Also, do a comparison between leasing versus purchasing while considering how often you want to replace the truck. Plan for five or 10 years out.

Q. I heard I could borrow from my 401(k) to help with the down payment. Can I do that?

A. We do not recommend borrowing from your 401(k) for financing. Nor should you take an early distribution because you will pay taxes and penalties. Leave the 401(k) fully invested so the funds can grow while you are working toward your retirement. Also, you should not take a home equity loan. You might get caught paying interest for 15 to 30 years, and you may get rid of the truck in five. LL

This article is written by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter-century. If you would like further information, please contact PBS at 800-697-5153 or visit their website at www.pbstax.com.

This column is the opinion of the writer and does not necessarily reflect the opinions of Land Line Magazine or its publisher. Please remember that everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.