The tax changes of 2017 caused some fleets to consider leasing as opposed to buying, and new accounting rule changes could have a similar effect, says Fleet Advantage.
Tax reform has likely contributed to a boom in new truck orders, but it has also increased the importance of asset lifecycle management, says Fleet Advantage, which provides data-driven truck leasing solutions.
"As evidenced by the heated economy and backlog of truck orders, private fleets and for-hire carriers are more aggressive today in replacing aging trucks. We're now seeing the effects of having access to this type of business intelligence that is shifting the business philosophy of asset management more toward a lease model," says Brian Holland, president & CFO of Fleet Advantage.
The company's recent benchmarking survey found that 47 percent of respondents said the recent tax reform – which allowed for 100 percent bonus depreciation of assets and a 21 percent corporate tax rate – has led them to consider leasing as an option.
Holland tells FreightWaves there has been an uptick in fleets considering leasing, including those that in past years dismissed it as an option. Part of that is the tax changes.
"We recommend companies look at leasing for a number of reasons; the new accounting [rules] is just one of those benefits," he says. Others include lower maintenance costs and improved fuel economy as fleets are able to switch to new vehicles more often, and the ability to react to changing market conditions, Holland points out. "Having a flexible leasing [program] allows for that."
The big changes in the past year have been the tax reform act passed by Congress in late 2017. That lowered the corporate tax rate to 21 percent and increased bonus depreciation from 50 percent to 100 percent, something that Holland says is leading to more fleets acquiring equipment now.
The flip side of that, he notes, is that buying equipment actually results in a smaller benefit to fleets because the cost of the equipment is being written off based on a 21 percent tax rate rather than a 35 percent rate. Lessors, while benefiting from the 100 percent depreciation themselves, have been able to pass along some of those savings to fleets in the form of lower payment terms, creating in some cases, a lower overall cost for equipment.
"Plus, they don't have to get rid of the truck [at the end of the lease]," Holland says. "To manage the lifecycle of an asset depends on the ability to dispose of that asset. Companies that want to buy and own their trucks are finding themselves essentially in the used truck market. If you have a bad outcome, it affects the bottom line of the business."
In part because of this, an equal number of fleets are now financing their vehicles through leasing (34 percent) as are using cash to purchase trucks. A plurality of respondents (37 percent) to the Fleet Advantage survey said they are disposing of their used equipment through trade-in programs with 33 percent turning to the wholesale market. One-in-four, though, said they are currently receiving below-market value for their used trucks, something that could be exasperated in the coming years as the record number of new trucks hitting fleets in recent years move into the secondary markets.
An upcoming change could also make leasing more attractive, Holland says. Lessees should benefit from new Financial Accounting Standards Board (FASB) accounting standards that take effect on Dec. 15, 2018, for public companies. All other companies can benefit from the change starting Dec. 15, 2019.
According to FASB, the rule will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.
"The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization's leasing activities," said FASB Chair Russell G. Golden in a statement announcing the rule. "It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions."
Under the guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Unlike current Generally Accepted Accounting Principles (GAAP) that require only capital leases to be recognized on the balance sheet, the new guidance requires both types of leases to be recognized on the balance sheet.
Holland explains that these changes have taken more than a decade to execute and are in response to the SEC determining that leased assets "met the criteria of a debt obligation."
"We've spent a lot of time speaking to customers and new prospects about tax reform and the new accounting standards," he says. "We've spent a lot of time trying to educate clients on what happened and what this means."
This change could increase the value of a leased asset to a fleet, as companies are only required to account for the value of the lease (present value of payments minus residual value) as opposed to the full cost of the asset if purchased.
"It's [actually] capturing the present value in the payment stream," Holland notes. You get the same benefit of buying new, "but it requires a smaller investment."
It remains to be seen whether the change will spur even more fleets to look at leasing, but Holland is certainly hoping that is the case.
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