To lease or not to lease - economic considerations for leasing cars and trucks

Nation's Business, May, 1988 by Julie Candler

To Lease Or Not To Lease By Julie Candler

Like the "sticker shock" that can hit shoppers in a new-car show-room, the Internal Revenue Service's "Schedule shock' has struck many businesses operating trucks or cars.

Companies now know how automobile and truck-related regulations of the Tax reform Act of 1986 are affecting them. As a result, many are rethinking their vehicle-acqusition policies. Is it better to own, lease or let employees provided the vehicles they use?

"We are back to the real economics of running a business, as opposed to a tax ploy," says robert Miesen, senior vice president of GE Capital Fleet Services, in Eden Prairie, Minn.

Leasing seems to be recieving the most attention. "We've noticing a big increase in our volume," says John Polk, vices president of marketing at McCullagh Leasing, Inc., in Roseville, Mich. It is the fourth-largest passenger-car leasing company in the nation.

"a survey of our members in late 1987 shows about half the 2.7 million vehicles they manage are leased," says David P. Lefever, executive director of the National Association of Fleet Administrators. "However, of those who own, about 10 present indicated their company was at least considering leasind, mainly because of the new tax law." The tax-reform law is also making leasing more attractive to firms using leasing more attractive t firms using medium-and heavy-duty trucks.

Fleet Owner magazine predicts that 40 percent oif the nation's largest trucks, the heavy-duty Class 8s, will be leased by 1992. The magazines reports that the No. 2 truck lease/rental firmm Hertz-Penske of Reading, Pa., expects to purchase 9,300 new vehicles this year, a 21 percent increase over 1987. The largest, the giant Ryder System, is looking at 23,000 additions to its fleet.

It takes shrewd calculating to discover the most cost-efficient policy. Now is the time to do it, advises Adlore Chaudier, of Runzheimer International, a Rochester, Minn., firm that tracks transportation costs.

As director of consulting services for Runzheimerhs publications division, Chaudier sees this as a transition period. "Companies are still working their way out of decisions related to tax reform. You will see more changes for 1988. we would recommend that companies review their fleet policies ... in terms of the overall corporate tax picture under the new law."

At the time Runzheimer International released a 1987-88 survey in August, 1987, it reported a 6 percent drop in total leasing since 1983. In contrast, fleets surveyed by the management-consulting firm indicated that employees providing vehicles climbed from 7 percent to 12 percent. Chaudier says the move to employee-provided cars is being made because of tax reform, corporate efficiency programs and rising insurance rates.

All of the 81 cars trucks owned by Shaw Industries at a Cartersville. Ga., plant were sold at the start of the year. Madalyn Cope, former fleet manager at the location, says employees were asked to provide their own vehicles following a corporate-wide decision by the nationally known carpet and yarn manufacturer, which is based in Dalton, Ga. Employees are not objecting to the request, she says. "Now they get an allowance for the use of their won personal vehicles."

But David Lafever of NAFA maintains that employee-provided cars are not practical for large fleets. "When all is said and done," adds John Polk of McCullagh Leasing, "reimbursing the employee is the most expensive option if you are going to do it fairly."

A major incentive for leasing comes from the loss of the investment tax credit of 6 percent to 10 percent formerly claimed in te first year of ownership. It no longer applies to cars and trucks placed in service after July 1, 1986, or to trailers after Jan. 1, 1987.

The tax change that may be the cost-liest for business owners of cars and light trucks is centered in the new depreciation schedules. the three-year write-off was changed; cars and light trucks are now five-year assets. And yearly depreciation amounts must be calculated on the $12,800 luxury-auto limitation, no matter how much the car costs.

"We are quite disturbed," says Fleet Operations Manager Johnnie

That's is the question that many businesses answer affirmatively after they examine the cost benefits and the tax advantages of letting someone else supply the wheels. Schmauder of Tektronix, Innc., in Beaverton, Ore. "The new tax law sets the price of a luxury vehicle at $12,800. That's the most you can use for depreciation purposes over a five-year period."

Shcmauder's firm owns its nationwide fleet to 1,000 vehicles, but that may change, he says. "Inflation has raised the value of some of our fleet's intermediate-size station wagons and minivans almost to the luxury category. Their retail price is probably more than $14,000."

The tax law's limit for depreciation over three years, the lifetime of most business cars, is $9,110 ($2,560 the first year, $4,100 the second, $2,450 the third).