Truck fleets and operators can once again take advantage of the Bonus Modified Accelerated Cost Recovery System (MACRS), or "bonus depreciation," in 2013. In early January, President Obama signed a tax bill passed by Congress to avoid the so-called “fiscal cliff.” The bill included a provision that allows fleets to deduct 50 percent of the cost of new trucks and other equipment in the first year of ownership.
In 2011, a similar stimulus measure allowed for 100 percent depreciation in the first year of ownership. In 2012, the accelerated write-off dropped to 50 percent, and would have expired altogether on December 31, 2012, had the new tax bill not included bonus depreciation.
Under the 50 percent bonus depreciation schedule, truck fleets and operators can take a 66.67 percent depreciation deduction in the first year of operation. It’s twice as much as what would be available in the first year under standard
MACRS. This acceleration in the depreciation schedule may offer loan customers a cash flow benefit by lowering their federal income tax for the 2013 tax year. That’s because they’ll have a much higher depreciation deduction for the trucks in the first year.
Some customers will not be able to take full advantage of bonus depreciation since they may not have enough taxable income to use the full depreciation deduction. These customers may want to consider leasing trucks instead of other methods of financing. Since PACCAR Financial can take advantage of the 50 percent bonus depreciation method, it can pass along bonus depreciation benefits in the form of lower payments on leases executed in 2013.
The U.S. Internal Revenue Service (IRS) provides two different property percentage tables for the purchase of trucks in determining how quickly companies can depreciate the cost of their truck purchase. Trucks with a fifth wheel are subject to the IRS’ three-year table. Trucks without a fifth wheel are subject to the five-year table.
To determine the first-year deduction under the three-year table, first multiply the cost of the new tractor by 50 percent to get the bonus depreciation. Then multiply the balance by 33.33 percent to determine the standard depreciation. Add the bonus depreciation and the standard depreciation together to determine the first-year deduction.
For example, if a company buys a $100,000 tractor with a fifth wheel, the IRS considers the equipment to have a positive book value for three years for tax accounting purposes. So, the company may claim up to $66,670 as depreciation in the first year under the 50 percent bonus MACRS schedule. That represents a first-year depreciation that’s $33,340 higher when compared to the amount available under the standard MACRS depreciation schedule.
To determine the first-year deduction under the five-year table, follow the same steps as those under the three-year table, with one exception: multiply the balance by 20 percent instead of 33.33 percent.
If a company is buying a $100,000 truck without a fifth wheel, the IRS considers the equipment to have a positive book value for five years for tax accounting purposes. So, the company may claim a $60,000 deduction as its first-year depreciation. That represents a first-year deduction that’s $40,000 higher than the amount available under the standard MACRS depreciation schedule.
The higher first-year deductions mean the company can lower its taxable income presuming it has enough profits to write off the depreciation fully.
In most cases, just about any taxable entity is eligible for the bonus MACRS. However, the trucks must be purchased or leased and placed into service before January 1, 2014. Company owners and managers should always consult an independent tax adviser for details and to determine actual eligibility.
PLEASE NOTE: Information in this article provided by PACCAR Financial should not be considered tax advice. Fleet owners or managers who believe their companies may be eligible for either or both tax incentives should always seek advice based on their company’s particular circumstances from an independent tax adviser before taking any action. If they believe their companies are not eligible, an independent tax adviser can also help them determine whether leasing offers a viable alternative.