Fleet Factoring Companies Are Busy This Tax Season
‘Tis the season for taxes—but this year things could be very different, especially in the trucking industry. The Tax Cuts and Job Acts was signed into law on December 22, 2017, signaling an overhaul to the codes the like of which we have not seen since 1986. The new tax reform will impact companies differently depending on how they are structured, and although many will see positive outcomes, independent contractors and sole proprietors will need to seriously consider the consequences of the new law and possibly consider a restructuring. Unfortunately, with financial capacity always a challenge, the effort could be daunting. The good news is that fleet factoring companies can help with resources, assessment, and the potential transition.
How It All Breaks Down
The C corporations will see a pretty dramatic decrease in federal income taxation from 35% to as low as 21%. Accountants for the S corporations will calculate 50% of W-2 wages, 20% of taxable income, and 25% of W-2 wages plus 2.5% of all qualified property and apply the lowest of the three totals. For the sole proprietor or contractor, it gets complicated, as profits are subject to both an income tax and a self-employment tax for Medicare and Social Security.
Kevin Rutherford, an accountant and owner of Let’s Truck, a services firm that works primarily with owner-operators, said that one major drawback to being a sole proprietor is that profits are subject to both an income tax and a 15.3% self-employment tax for Medicare and Social Security.
An S-Corp or pass-through company has a way of lowering liability, but it takes time and consultation to determine whether the transition is right for your company. Fleet Factoring companies offer immediate access to cash flow to maintain payroll while investing in these types of services and consulting. The everyday aspects of operation could be affected by these new laws, so it is important to know the details. In the end the investment is worth it.
Top 3 Changes Impacting Trucking
1. Changes to Depreciation and Equipment Transactions
For equipment acquired and placed in service after September 27, 2017, taxpayers will be allowed to write off 100 percent of the cost under the revised bonus depreciation rules. The 100 percent write-off will begin to phase down 20 percent per year starting in 2023 until it is scheduled to sunset at the end of 2026. Under the old law, bonus depreciation applied only to new property, but has now been expanded to include used property as well. Keep in mind that many state jurisdictions do not allow bonus depreciation and require an adjustment to taxable income.
Section 179 limitations have been increased to allow for expensing of up to $1 million in equipment as long as total equipment purchases for the year do not exceed $2.5 million. The Section 179 limit for heavy SUVs remains at $25,000. Both of these amounts will be indexed for inflation for tax years beginning after 2018. As with bonus depreciation, many state jurisdictions require an adjustment to taxable income for Section 179 deducted in excess of $25,000. Interestingly, some states allow the bonus depreciation but not Section 179, and vice-versa. This will create some tax planning opportunities for trucking companies that have significant mileage in one of these states.
Like-kind exchanges have been a popular tool to defer gains on equipment sales, but going forward, their use will be limited to real property transactions. While at first this might seem detrimental, the tax effect will be mitigated in the mid-term with the 100 percent bonus depreciation allowance. S corporations with built-in gains exposure (was a C corporation within the last five tax years) will be impacted by this law change as like-kind exchanges were an effective tool used to defer built-in gains.
As fleet factoring companies often support fleets with vehicle purchases, the new tax laws should be carefully considered and discussed as part of the purchasing strategy.
2. Changes to Per-Diem Programs
Many trucking companies have successfully implemented per-diem programs to aid in driver retention by putting more money in the drivers’ pockets. There are no changes in the new tax law to these company-sponsored per-diem plans. Under the old law, employee drivers of companies that do not offer a per-diem plan were able to claim their own per-diem deduction as a two percent itemized deduction. Under the new law, two percent itemized deductions have been suspended and your employee 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 employee driver. For companies that have previously considered adding a per-diem plan but have yet to do so, now is a great time to reconsider your recruiting strategy. Fleet factoring companies can provide resources to help you implement a new program.
3. Changes to Tax Rates and Entity Tax Considerations
One of the primary goals of tax reform was to enhance the competitive landscape of United States businesses through a reduction in the corporate tax rate. The new law was successful in this area, slashing the C corporation tax rate from 35 percent to 21 percent. S corporations and other pass-through entities were not left out, as there is a new 20 percent deduction for domestic “qualified business income.”
Trucking companies that are currently S corporations might be wondering whether switching to a C corporation could be beneficial as a way to take advantage of the lower corporate tax rate. Careful consideration must be given before deciding to revoke your company’s S corporation election. C corporation earnings will continue to be subject to double taxation, and therefore 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. As an additional consideration, S corporation shareholders who have suspended losses would forfeit those losses upon revocation.
So although it may seem like a contradiction, the tax laws are broad but also very specific. What they do indicate is that no matter what size your fleet, you will experience changes. Fortunately, as long as you are prepared, with a clear understanding and ready consultation, along with resources from your fleet factoring company, tax season does not have to be as stressful as you might have anticipated. It might even push you to reconsider your working model and grow.