Leaving aside questions of whether the “Cash for Clunkers” legislation currently up for additional funding is good for the economy, it presents a good opportunity for re-evaluating your business use of vehicles.
There are three main questions for business owners in deciding whether trading in an old vehicle is worth it:
1. How much money do you save in gas, for a more fuel-efficient car, in relation to money laid out for purchasing it?
2. Can you depreciate the value of the new car as a deductible business expense, thus offsetting the purchase price with additional tax savings?
3. How much does your more fuel-efficient vehicle reduce your environmental impact (and is this part of your branding)?
The first question is simple math, made not-so-simple by the fact that gas prices are unstable. If your use of the vehicle remains roughly the same, and so do gas prices, then you can use the difference in miles-per-gallon between the old and new vehicles to calculate how much you will save over the next 4-5 years of use.
But the future of gas prices is hard to predict. As EnergyTechStocks.com reported in March, “noted consulting firm McKinsey & Co., Saudi oil minister Ali Al-Naimi, and “dean” of oil analysts Charles Maxwell of Weeden & Co. all say that an oil price shock that hits between 2010 and 2013 now appears all-but-inevitable.” Run the numbers with gas prices returning to their $4-$5/gallon highs, and see what you will save.
For a specific comparison of two similar vehicles, take a look at our earlier post: Fuel Efficiency – good for me, good for the economy.
If your small business has an older, inefficient vehicle that you need for business purposes (things like making deliveries, or getting from one job site to another), you should have been deducting expenses for it already, either directly as mileage/insurance, etc., or by purchasing the vehicle as a business asset and depreciating it.
If you have been listing depreciation as a business deduction, your older vehicle may be close to losing its tax write-off value for you anyway. Buying a new business asset which resets the depreciation available may make sense, especially when it comes with greater gas savings.
Of course, buying a newer car also means lower maintenance and repair costs, at least initially, and fewer repairs means less time your vehicle is out of commission, causing you lost or delayed sales.
TurboTax has a nice overview of Business Use of Vehicles, but as with any major purchase for your business, do remember to consult your accountant.
How important is it to you, personally, to reduce your carbon footprint? How important is it to your business brand? You should realize that your company car sends a message, especially if it displays your logo. If your target market includes people who are making their own efforts to live and buy “greener,” walking your environmental talk may be a smart business move.
Real impact versus perceived impact
Eric Morris, a researcher at UCLA’s Institute of Transportation Studies and an urban planner, gets into the nitty-gritty of environmental impact in “Buy an SUV, save the planet.” He analyzes the relative environmental cost of driving the following vehicles:
– a 2009 Toyota Prius (est 46 mpg)
– a 2009 Toyota RAV4 2WD (24mpg)
– and a Land Rover Range Rover Sport (14mpg)
Surprisingly, he finds that “upgrading the inefficient S.U.V. to a more efficient one would save a lot more fuel — 372 gallons per year — than the 250 gallons saved from the switch from an efficient S.U.V. to the most fuel-efficient car on the market.” This is good news for business owners who need lots of cargo room in their business vehicle. How does he get there?
“Let’s consider not miles per gallon but gallons per mile (or, to make the numbers prettier, gallons per hundred miles). By this metric, we get an unclouded picture: the Prius uses 2.17 gallons per hundred miles, the RAV4 uses 4.17, and the Range Rover uses 7.14.”
This comparison is useful to anyone who bought a large vehicle for business use under the Bush-era business SUV tax break incentive. Originally intended for small family farms purchasing pickup trucks and cargo vans, this tax break applied to any vehicle over 6,000 pounds, and was also available to business owners purchasing SUVs in that weight class, which include some of the most fuel-inefficient vehicles on the road.
However, there’s still the issue of customer perception. This real environmental benefit is less visible than the green halo around the Prius brand, so if your concern in upgrading is “greening” your brand, be prepared to do some explaining.