Should You Buy That Truck Before Year-End?
Every December, someone tells a business owner to buy a truck or a piece of equipment before the year ends “for the tax write-off.” Sometimes it’s the dealer, sometimes it’s a buddy at the supply house, and sometimes it’s the CPA. And sometimes it’s good advice. But a tax savings only helps if the purchase made sense in the first place, and that part tends to get skipped when there’s a deadline attached.
Here’s how I’d think through a year-end purchase before signing anything.
The Write-Off Still Costs Money
A deduction lowers your tax bill, but it doesn’t make the truck free (for you Seinfeld fans, this was Kramer’s understanding!). Let’s say you buy a $70k truck in December, and your CPA estimates it’ll lower your tax bill by around $15k. You still spent $70k to save $15k, so the truck needs to be worth the other $55k to the business. If it’s replacing a truck that’s falling apart or adding a crew you already have work for, that’s probably an easy yes. If it’s a nicer version of a truck that was working fine, you’ve spent a lot of cash to pay a little less in taxes. And you need to think about how the new truck payment will be absorbed over the winter which may be a slower time of year.
How much a purchase saves in taxes depends on your business, your income this year, the equipment, and the current rules, and that’s your CPA’s call. What we can help with is the other half: whether the business needs it, whether it can afford it, and how it should be paid for.
Five Questions Before You Buy
1. Would you buy it in March?
This is the simplest test. If the tax deadline weren’t there, would you still buy this truck in the next few months? If the answer is yes, year-end timing might be a bonus. If the answer is no, the tax savings is the only reason, and that’s usually not enough.
2. Will it earn, save, or protect money?
A good equipment purchase does at least one of three things: it brings in more revenue, it lowers costs (like repairs on the truck it replaces, or labor hours on a slow job), or it reduces risk (like breakdowns in the busy season). If you can’t point to which one, it’s probably a want more than a need, and that’s fine as long as you know that going in.
3. How fast does it pay for itself?
Take what the purchase costs and divide it by how much extra profit it brings in each month, after the tech’s pay, fuel, insurance, and the payment. A rule of thumb I use: if the payback runs past about 18 to 24 months, I’d reconsider, look at leasing, or wait. Here’s how two different December trucks might compare:
| Truck A: adds a crew with work waiting | Truck B: an upgrade for the tax savings | |
|---|---|---|
| Price | $70k | $70k |
| Extra profit each month | About $3.5k after crew pay, fuel, and insurance | About $0, it replaces a truck that was working |
| Payback | About 20 months | It doesn’t pay back on its own |
| Tax savings (your CPA’s estimate) | Around $15k either way | Around $15k either way |
| Makes sense? | Probably, and the timing helps | Only if you’d buy it anyway |
4. Can the business carry it right now?
Before any purchase that adds a payment, I’d check the current ratio: current assets divided by current liabilities. It’s a quick way to see whether the business can cover what’s coming due in the next year. In my talks I use a sample business owned by a guy named Dave, whose current ratio is about 1.11. That means he has a little more cash in the bank than what he owes in short-term debt like credit cards and lines of credit. A healthy range for a service business is around 1.5 to 2.0. If you’re closer to Dave’s number, adding a down payment and another monthly payment right before the slow season is how a good year turns into a tight January.
It also helps to look at your cash runway, which is cash in the bank divided by average monthly expenses. If a $7k down payment takes you from four months of runway to under three heading into winter, that’s worth knowing before you sign.
5. Is there a cheaper way to get the same result?
A used truck, a lease, renting for the few weeks you really need it, or getting another year out of the current truck with a repair might get you most of the benefit for a lot less cash. Equipment Financing vs. Leasing walks through how to compare those options.
If You Do Buy, a Few Things to Ask
- Ask your CPA what counts for this year. Whether ordering in December is enough, or the truck has to be delivered and put to work before December 31, is a question for your CPA, and it matters if the dealer’s delivery date is “late December, probably.”
- Decide how you’ll pay for it. Paying cash protects you from interest but drains the account right before winter. Financing keeps cash in the bank but adds a payment. A mix is often the most comfortable. I’d try to match the loan term to how long you’ll actually keep the truck.
- Time it around your cash. The best time to buy is usually right after your strongest months, when the account is full. For a lot of trades, December is already past that point.
- Put it in next year’s budget. The payment, insurance, and fuel for a new truck should show up in January’s plan, so it doesn’t catch anyone by surprise.
Where to Start
If you want one thing to do this week, ask your CPA for a year-end tax estimate before you go shopping. Then run the five questions above on the truck you’re considering. If it passes on its own, the tax savings is a bonus. If it only makes sense because of the tax savings, that’s your answer too.
If you’d like a second set of eyes on a purchase before you commit, a free Cash Clarity Call is an easy place to start, and we can run the numbers with you.
