April 2019 might seem far away, but the decisions you’re making now are affecting how much money you'll end up paying next tax season. And with the newly implemented Tax Cuts and Jobs Act in effect, next years return will be calculated much different than prior years.
To understand how new tax laws affect the trucking industry, and learn how to make optimal financial choices today, read on.
What does the Tax Cuts and Jobs Act change?
The Tax Cuts and Jobs Act, which was signed into law by President Trump on December 22, 2017, has brought more change to the U.S. tax code then Americans have seen for the last 30 years. While there are many variables to consider, Troy Hogan a transportation industry tax expert and CPA at Katz, Sapper, and Miller Advisory Group says there are three main takeaways that all trucking companies should be aware of.
1. Depreciation and Equipment Transactions
Previously, bonus depreciation only applied to new property, but it now includes old property as well. From now until the year 2023, acquired equipment that is placed in service will be allowed a 100 percent write off under the newly revised bonus depreciation rules. Starting in 2023, that 100 percent write off will decrease 20 percent each year until it no longer exists at the end of 2026.
Section 179 has been expanded and now allows for up to $1 million in equipment expensing. However, total equipment purchases can't exceed $2.5 million for the year. Hogan says to keep in mind that some states allow for bonus depreciation, but not the Section 179, and vice-versa.
Like-kind exchanges have gone away for equipment, but are still in effect for real-estate.
2. Per-Diem Programs
Trucking companies who do not currently have a per-diem plan may want to consider adding one. Drivers of companies that do not offer a per-diem plan will no longer be able to claim their own per-diem deduction as an itemized deduction. Therefore, even though tax rates overall have decreased and standard deductions have doubled, some company drivers may see an increased tax bill next year.
That's why Jim O’Donnell, CEO, and Founder of Trucker Tax Service, told Fleet Owner he has “already heard from one client that his company is going to bump the per diem pay to 16 cents a mile.”
Because per diem pay is considered reimbursement pay, it does not need to be claimed on tax returns. Higher per diem rates put more money in the driver’s pocket and keeps it there. In addition, trucking companies can turn around and write that reimbursement pay off as an expense. It’s a win-win situation, and a simple way trucking companies can attract and retain drivers.
3. Tax Rates and Entity Tax
C corporation tax rates have been reduced from 35 percent to 21 percent. However, C corporations will still be subject to double-taxation. Meanwhile, S corporation and other pass-through entities will see a new 20 percent deduction for domestic qualified business income.
Hogan has cautionary advice for S corporations considering making the switch to a C corporation. He warns that S corporation shareholders with suspended losses would have to forfeit those losses if a switch was made. In addition, S corporations are not subject to gross income limitations when choosing an accounting method.
How should trucking companies react to the Tax Cuts and Jobs Act?
It’s important for trucking companies to understand new tax laws and how to best take advantage of them. But, it’s also important to remember that these tax laws mean different things for different trucking companies. There is no one-size-fits-all approach, it’s all about making the overall best choices for your particular fleet. Even more important, fleet owners must not become so focused on their current year tax situation that they ignore the long haul. Successful businesses consider and plan for the long term.
For example, a fleet owner might consider buying a truck late in the year to gain the deduction. It’s true that will result in lower taxes for that fiscal year, however, the acquisition is just a short-term piece of the equipment’s overall lifecycle. For a truck to be deducted, it must be placed in service before the end of the tax year. That means additional operation, maintenance, and compliance costs now, and for years down the road. And this is all assuming that you actually need the truck.
The best course of action is to meet with a tax expert you trust in order to understand all the changes this new tax code has brought. What is best for one company, may not be ideal for yours. This post does not intend to provide any specific tax advice.