The long, hard-fought push to pass tax reform last year – a push directly encouraged by elements of the trucking industry – is now poised to benefit motor carriers and drivers alike in many ways; just witness the monetary savings achieved by J.B. Hunt due to the tax law changes.
The first significant reform of the tax code in 30 years – since Ronald Reagan’s presidency – is being characterized as economic “rocket fuel” by some that will not only boost business investment, repatriation of monies stashed overseas, and expansion but raise worker wages, too – with bonus checks thrown in for good measure.
What’s trucking’s response to tax reform? According to a survey of American Trucking Association (ATA) members, 50% plan to either increase wages generally or offer a one-time bonus to their workers.
That survey also found that 47% of fleets plan to take the “windfall” from tax reform and buy new trucks and trailers with it – a move several analysts think will gain speed this year and next.
To gain some further insight into the tax reform trends that will impact trucking, I talked with Troy Hogan, a director with Katz, Sapper & Miller (KSM) and Mark Flinchum, a partner in KSM’s transportation services group.
Hogan’s first take is a note of caution. “This is the biggest shake-up in tax law in 30 years and there are still a lot of holes in it that we are waiting on the IRS [Internal Revenue Service] to fill with guidance,” he explained.
“There are a lot of interpretations [of the tax law changes] yet to be made; not just this year but over next few years to give us more clarification as to what the changes mean,” added Flinchum. “There’s also some chance that parts of the law will go back to Congress for them to figure out.”
From a broad perspective, the lower overall tax rate paid by businesses (more on that later) is the big benefit.
“Overall that is the greatest thing; almost everyone pay less tax going forward and to continue to keep deferring tax through bonus depreciation,” said Hogan. “For the majority of businesses in general, this will be good for them.”
From a more trucking-specific perspective, revision of “bonus depreciation” rules is a major benefit.
First, for equipment acquired and placed in service after Sept. 27 of last year will be allowed to be written off at 100% of its cost, with that 100% write-off phasing down 20% per year starting in 2023 until that provision is goes away at the end of 2026.
“Under the old law, bonus depreciation only applied to new property, but has now been expanded to include used property as well,” Hogan said. “However, keep in mind that many state jurisdictions do not allow bonus depreciation and require an adjustment to taxable income.”
In addition to bonus depreciation changes, Section 179 limitations have been increased to allow for expensing of up to $1 million of equipment – as long as total equipment purchases for the year do not exceed $2.5 million, with both of those amounts will be indexed for inflation for tax years beginning after 2018.
However, truckers rarely use Section 179 as in Flinchum’s words “it’s very easy” to spend over $2.5 million on commercial vehicles and related equipment in a single year. “Besides with bonus depreciation rules being expanded to cover used equipment now, it’s even less likely trucking companies will use Section 179.”
There’s a bit of a caveat to that, however, at the state level. As with bonus depreciation, many state jurisdictions require an adjustment to taxable income for Section 179 deductions in excess of $25,000.
Interestingly, some states will allow the bonus depreciation but not the Section 179 – and vice-versa.
“This will create some tax planning opportunities for trucking companies that have significant mileage in one of those states,” Hogan noted.
There’s also been a lot of talk about how “per diem” rules are being changed.
In KSM’s view, though, drivers and motor carriers already using per diem program won’t see anything change.
From the Latin, “per diem” literally means “per day” and refers to a non-taxable reimbursement for meals and other incidental expenses. For income tax purposes, getting paid a “per diem” will reduce a driver's gross income, thus reducing the amount of taxes they owe to IRS
There are no changes in the new tax law to such “company sponsored” per-diem plans. “And if you are an owner-operator filing a 1099 form as an independent contractor, life has not changed for you, either,” Flinchum said.
However, for drivers of motor carriers that do not offer a per-diem plan, under old law, they were able to claim their own per-diem deduction as a 2% itemized deduction.
Under the new law, though, such 2% itemized deductions have been suspended and it is possible that drivers may now face a tax increase. However, the standard deduction has also been doubled and tax rates overall have decreased, so the actual tax impact will be unique for each driver, Hogan explained.
“In sum, this change will behoove trucking companies to explore adding a per diem program if they don’t have one,” he said.
Finally, one of the primary goals of tax reform was to enhance the competitive landscape of U.S. businesses through a reduction in the corporate tax rate.
Again, as noted above, the new law slashed business taxes across the board. The C corporation tax rate dropped from 35% to 21% and S corporations and other pass-through entities got a benefit, too, as there is a new 20% deduction for domestic “qualified business income.”
That deduction is generally limited to the greater of either:
- A 50% of the allocable W-2 wages paid with respect to the qualified trade or business, or;
- The sum of 25% of the allocable W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property.
Trucking companies that are currently S corporations might be wondering if switching to a C corporation may be beneficial so they can take advantage of the lower corporate tax rate.
But Hogan stressed that careful consideration must be given before deciding to revoke an S corporation election as C corporation earnings will continue to be subject to double-taxation.
Thus, under many scenarios, S corporations will still have an overall lower effective tax rate. Additionally, S corporations are not subject to gross income limitations when choosing the overall cash method of accounting that many trucking companies enjoy, he said.
“As an additional consideration, S corporation shareholders that have suspended losses would forfeit those losses upon revocation,” Hogan added.
So far, then that’s what the tax reform landscape looks like for trucking. Yet more changes will no doubt be unveiled – perhaps good, perhaps not-so-good – as Congressional tweaking and IRS guidance come in play.
