OWN VS LEASE (for the big companies)
 

I'm trying to understand what the big companies do and what is better if for no other reason than I am curious.

My friend just got two more trucks and he is leasing them. I don't understand the benefit of leasing to owning. I found the followin in an FFE press release:

"For a number of capital and tax reasons, we lease most of our tractors and around half of our trailers. When you own an asset, only the depreciation is in operating expenses. The interest on any money you borrow to buy the asset is a non-operating expense. When you lease an asset, the entire lease payment, a component of which is the return on the lessors' investment, gets included in operating expenses. That impacts the operating ratio. We estimate that on an annual basis, if we owned the assets we lease, although our pre-tax result would not change, about $5 million would shift from operating to non-operating expenses, or about $1.25 million per quarter, about the same as our third quarter 2007 operating loss."


From this it seems like it wouldn't make a difference if they own or lease as from what this says to me it more affects operating ratio than profit. Maybe no_worries can explain this to us? :)

I think what this press release is saying is if they owned their trucks instead of leasing them, the expenses they can claim for tax purposes would reduce by 5,000,000 bucks. Basically, if they pay tax on $30 mln now, they'd be paying tax on $35 mln were they to switch to owning! So, first you have a higher monthly payment when you FINANCE a truck instead of LEASING it, and then your tax bill is going to be a killer too. Makes sense to me...

Not exactly. The FFE statement is saying the following: By leasing instead of owning, we make one of the numbers that investors and creditors like to look at appear more attractive :lol: Operating ratio is one of the biggies used to determine the relative performance and fiscal health of a company.

The tax advantages associated with leasing derive from the fact that your monthly payment is deductible right away. When you purchase equipment, your deductibility each year is limited by the allowed depreciation. The shorter the time period, the more tax benefit you get from leasing. This applies mostly to large companies. There are special depreciation rules for small businesses that offset most of the tax advantages of leasing.

The main reason most small businesses lease is to preserve cash-flow. There is a much larger initial expenditure required to purchase. This is especially true in a business such as trucking where the cycles and seasons are so volatile. Also, 1+ year into a freight recession with no end in sight, most companies are all about preserving capital. Why sink money into a down payment when you might need it for fuel and payroll next month?

Advantages To Leasing-

1. Preserves Capital
2. Reduces Taxes
3. Improves Cash Flow

Advantages To Buying-

1. Builds Equity
2. Allows you to pay the truck off & operate with no payment.

My CPA says buying makes more sense for most small businesses.

Buying a truck, as an o/o, allows you to deduct the depreciation. Leasing lets you walk away, and have no commitment, while still getting to write off the use of the equipment.

I wish I could walk away from my lease,doesn't work that way.

It's basically the same as a loan,only no down payment and get to deduct the entire payment for taxes,If I want to pay it off I would have to take the payment amount x the amount of payments left,not really feasable so this is my truck no matter what for the next 35 months.

I didn't know you are leasing Mike. So after the next 35 months you can either buy it or just start over? Was the difference in price between leasing and owning that much? I only had to put down 10% which was only $6000.

Actually I am not so good with numbers and math and to be honest this thread brings even more questions to my mind now.

Ok say lets say these bigger companies have plenty of cash, what would be the best option? I know from looking at some of Crete, Werner, Schneider, J.B. Hunt that they must own some of those things cause some look old.

In my mind as far as autos go, leasing is never better then owning. I do understand improving cash flow as most of you know I am a heavy user of debt to finance my affairs.

I asked my friend why do companies trade in after 3 years and he said cause they lose the benefit of depreciation. But it seems if you have a decent truck with no payment that will trump everything. (no_worries go easy on me if I'm talking foolish here :) )

Seems to me if you lease you are paying higher interest. Bank of America just closed the type of money market I had (without letting anyone know, good thing I was paying attention) and as these banks are dropping interest rates I put some in a CD but I also paid down to $0 a line of credit I had which was essentially for the truck. The rate for that truck was 7.99%. So basically I am paying 0% (I still have a truck payment from another angle (I split it all up). But the point is I a have the truck and am paying 0% (for half of it) so how could leasing be any better?

I know I'm a small operation, but if we did this on a larger scale, I guess what I am trying to say is, is it always better to lease for these big companies?

It's really just a loan,the truck will be mine when the payments are finished.No balloon payment just 60 payments.

You just can't pay against the principal and the whole payment is tax deductable instead of depericiating it off.

When I bought the truck I was....lets just say not in a great financial
position and didn't have enough for a decent size down payment on a 95,000 dollar truck,so this is how I did it,might not and probably isn't the best choice to do it that way but I had to make a move and I did it.

Not always better for the biggies. One thing many of them do is buy the trucks through a subsidiary of the parent and then lease them to the trucking company. There's lots of playing with numbers that happens with corporations. Much of it has less to do with actual savings than it does making things look better for investors and creditors.

As a one truck operation, it's almost always better to purchase. The longer you can spread your cost of ownership out, the better for your bottom line. Once you get into owning a fleet, it becomes trickier. One of the reasons you can make your truck last for you is because you take care of it. You baby it, you fix things when they go wrong, and you know when something is a little off. Your equipment doesn't get that treatment when you've got someone else in the seat. The big companies have found that it's much more cost-effective for them to buy the cheapest trucks drivers will tolerate, maintain them at the minimum level required to last the cycle, and turn them over relatively quickly.

Walk-away leases are few and far between anymore. Almost all obligate you to pay the residual value at the end of the lease. Often you're obligated to purchase the vehicle through a balloon payment, which of course can be refinanced. Many so-called walk-away leases today mean that the leasing company will sell the truck and if it brings at least as much as the residual, you owe nothing. If not, you owe the difference.

One advantage to leasing is how it is treated on the balance sheet. Unless things have changed, leased vehicles are not counted as a liability on the balance sheet. If you are purchasing it though a loan then it is considered a liability.