I recently fielded questions from several clients who are in the process of purchasing new vehicles for their pest control businesses and are wondering if leasing or purchasing is more advantageous in today’s environment.
Details have been changed to protect the innocent, but I thought other PMPs could benefit from the information.
For starters, let’s review the two types of leases:
- A capital lease, which affords all the depreciation benefits including 179 expensing. Capital leases are shown as assets on the balance sheet and depreciation is taken.
- Disadvantage: The imputed interest rate a leasing company offers is usually more than a bank.
- Advantage: Most leasing companies do not report to credit agencies, so it does not use up your available credit.
- An operating lease, which is a straight rental agreement. Your lease payments are deductible, but there is no depreciation or interest deduction. If you are starting out and don’t need the deductions, payments are usually less than a capital lease.
As for financing, you will get all the depreciation and interest deductions, and you’ll probably get a better interest rate. However, the transaction will be reported to the credit agencies.
Truck Resale Value vs. Lease Terms
Q1: Given the nature of our industry, would resale value at the end of ownership outweigh potential lease savings?
A: If you do an open-ended capital lease, which most fleets are, there is a residual value that is set when you sign the lease. Once the lease is over, you can either buy it out or have the leasing company sell it. If they get more than residual, they will actually cut you a check for the overage. If they get less, they will look for you to make up the difference.
With an operating lease, they will just take it back. The only thing you would pay is excessive damage or wear and tear.
With a financing transaction, the truck is yours to do what you like.
Tax Benefits of Buying vs. Leasing Pest Control Trucks
Q2: With our company being smaller at the moment, are there any significant tax advantages to leasing over purchasing (section 179 deductions, lease write-offs, etc.)?
A: Not really. Do you have outside interests that you can offset the business loss against, caused by depreciation and just getting the pest company off the ground? If so, then capital leasing or financing makes sense.
Maintenance Costs of Buying vs. Leasing
Q3: Does leasing provide any advantages in terms of maintenance and warranty coverage that might lower long-term costs? I know with a larger fleet this makes a lot of sense.
A: If you go with a large leasing company, they usually have maintenance plans available for an added cost that is usually on par with what you would pay yourself, but the maintenance is structured so it forces you to do the work, which works well for some owners.
Market Conditions for Purchasing or Leasing
Q4: Given current interest rates and vehicle supply trends, does one option stand out as more financially sound?
A: If you have plenty of credit available to you, the financing is probably the most prudent option.
These are the kinds of pest control business management questions we answer for our accounting and bookkeeping clients every day. Get in touch to learn more about the CFO consulting services PCOB clients receive.
