When Purchasing Buses, Planning is Key

There was a time when I needed to convince bus lenders that I was a worthy risk and needed to grow the fleet. During those early years the challenge was overcoming tight cash flow and a less than stellar payment history. Paying corporate income tax was not an issue as we continued to generate losses carried forward. Later the company matured and prospered, and as a result the earlier asset created tax losses disappeared. When a company and its bottom line are healthy, you will probably find yourself paying taxes.

As you may know, one way to reduce your tax liability for the short term is to take advantage of tax laws regarding asset depreciation. Bonus, Section 179 and accelerated tax depreciation allows you to expense the asset quickly, sometimes all in the first year, therefore reducing your net taxable income. This can help you if you continue to expand and really NEED the new buses. Adding buses to the fleet only to save on taxes is not always the answer. You can grow yourself to bankruptcy. As we have referred in previous blogs, planning is a key to running a successful business. So…

Why buy?

  • Long term plan >24 months out
    • Obsolescence
      • My bus is worn out
      • Maintenance costs are extreme
      • There is no curb appeal
      • Desired amenities are lacking
      • The government says I cannot run this engine anymore

An investment made to upgrade this bus is always an option. This will depend on your market. Is there a continued need for a clean, well running and updated early model bus? Will the continued use of a refurbished bus recap the investment made to upgrade it, or will it sit in your yard regardless? Perhaps it is best to trade or sell it, keeping the fleet size the same. Can you afford a new addition, or must you replace it, not having enough business for both? These are important asset decisions every bus operator must make.

  • Planned Expansion
    • Cash reserves are up
    • More loans are paid off
    • Additional payments cash flow, new credit is available
    • Company stability is achieved. The human resources are ready for growth

Your company has matured through its last expansion, and as planned, you are financially and psychologically prepared to expand. This long-term planning takes your personal life into consideration, your goals, desired life style and planned secession.

  • Short term plan 6-24 months out
    • Market changes
      • Competition is falling short
      • New competition has entered the market
      • Economic conditions

The market drives much of what a business can and cannot do. Although a business is generally unable to control market fluctuations, it must react accordingly and be prepared to expand, maintain, or retract its business model to withstand market volatility.

  • New business
    • Existing clients demand more service
    • New clients are seeking service
    • Opportunity to operate additional types of service
  • Shift in customer expectations
    • Demand for new bells and whistles
  • Previous purchases
    • Lack of support from dealer
    • Model not performing to expectations

The above are all reasons to add or replace buses. Be careful to think it through and not make a knee jerk decision. Is the new service well planned and is ready to be marketed? Do you have a marketing plan so that potential customers know you are adding the cool new stuff? The new business your sales team has generated – what are the expectations, will early model buses work or do they require new? Business that can use your older models is golden as it keeps the debt free buses running. Can you work out the issues that you are having with the problem bus, or do you need to trade it out and take the hit? Do you have the human resources to expand? Or is it best to maintain and use the opportunity to raise rates? And by all means, run budget scenarios to explore what your proposed changes to the fleet will do to your bottom line.

  • Immediate need
    • Unexpected expansion
      • Contract awarded unexpectedly
      • Competition closed its doors

Here is where a company’s planning can pay off the most, being prepared for the unexpected. Your business plan is up to date, your financial reporting is current and accurate, your loan request package is always ready to deliver. You have solid business relationships with dealers and lenders who are always ready to assist your company’s needs.

  • Tax saving
    • Tax savings should not be the only reason to purchase
    • Incorporate your purchasing plan into your tax plan

Understand the tax saving opportunities available. Seek the help of a CPA who is familiar with your industry. Plan by budgeting. Your tax liability should not be a surprise and force you to buy December leftovers. Predict a few years out what your net income, additional purchases, and tax liability is expected to be. Then monitor and adjust as the months roll on. Do not wait until year end to make your buying decision.

  • Impact of panic year end purchasing
    • Limited choices to buy
    • Inconsistencies of last-minute purchasing
      • Varied fleet make and model
      • Different power trains
      • Amenities not available
    • Limited price negotiation
    • Limited credit negotiation
    • STRESS! Avoid it through proper planning. Be prepared.

Let the experienced team at BUSBooks help you plan your future and move your company forward. 

The next Nerd News will discuss 2018 Taxes.

Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator

BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.