How Remanufacturing Fleet Vehicles is a Smart Financial Decision
Once a fleet vehicle gets so many miles on it, repairs and maintenance start adding up fast. Eventually the vehicle hits a tipping point where the expense of the repairs exceeds the value of the vehicle or the risks of safety or performance could jeopardize the job. At this point we would refer to this as the end of the vehicle’s economic life. While a fleet owner may salvage the vehicle to get some financial return, the salvage value is considerably lower than the cost of a new fleet vehicle. But purchasing a new vehicle isn’t the only option.
When you remanufacture a vehicle, you are able to ignore the salvage value and upcoming repair costs. This means that the tradeoff between a possible salvage value and the cost of repairs is moot and you have the ability to retain the value of the vehicle, even with a failed system or subsystem.
Instead of doing repairs as they come up, you can remanufacture the vehicle which will make everything virtually new again. It’s significantly less expensive than buying a new fleet vehicle to replace it, and the vehicle now has a second life and the potential to double its mileage. Since the depreciation curve is flat in the later years of a vehicle’s life, you’ll always retain the salvage value at the end of its life.
When You Should Remanufacture a Fleet Vehicle
Remanufacturing a vehicle should come at a certain point in the vehicle’s life. This might include:
- The end of the vehicle’s economic life – This happens when the vehicle’s salvage value is higher than the economic value minus anticipated repair costs. At this point, remanufacturing the vehicle allows the fleet manager to use the vehicle until it completely fails or until it becomes unsafe to operate.
- The end of a vehicle’s service life – This is when a vehicle has a lot of miles (generally more than 100,000 miles), has many idling hours, or it was used in harsh conditions. At this point, maintenance might become so costly that it doesn’t make sense to keep the vehicle. Generally, repairs and maintenance exceed the vehicle’s economic value. Remanufacturing the vehicle adds to the service life of the vehicle while decreasing maintenance and repair costs.
- When you have system failures – when an expensive part of the vehicle fails, such as the engine or transmission, remanufacturing could restore the vehicle’s economic value by remanufacturing those specific systems. However, if more than one system or subsystem has failed, then remanufacturing makes even more sense since you have one down period instead of several to repair aging systems.
- When your vehicle is involved in a collision– Even in a collision that is severe enough to bend the frame, a state-of-the-art body shop with frame straighteners and other technology to repair body damage is able to make a fleet vehicle very serviceable again.
In fact, the whole vehicle could be remanufactured. Depending on the replacement cost, this may still come out to be 30-50% cheaper than purchasing new.
Remanufactured Vehicle Accounting
Tax accounting is the driving force behind fleet management.
You can either expense or depreciate the remanufacture service cost; either way, the IRS requires you to be consistent.
If you expense the cost, the reman cost is viewed as a repair. If you decide to depreciate the service cost of a remanufactured vehicle, you may choose to in one of two ways: Add the cost of the reman to the cost-basis of the vehicle and restart or continue the depreciation. Alternatively, sell the ‘core’ to Vehicle Reman. Vehicle Reman can then sell the remanufactured vehicle back to you which effectively starts a new depreciation event. With this second method, you are “trading” your vehicle in and may pay less in vehicle tax than you do in sales tax for the remanufacturing service. Circumstances vary and there are many options, so, always check with a tax professional about how to treat the transaction.