On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), also known as tax reform. The $1.5 trillion tax legislation is the biggest change to the tax code since 1986. The implications for school bus companies are complex so we have summarized the most commonly asked questions related to the tax reform:
Q: How does the corporate tax rate reduction impact school bus companies?
A: The corporate tax rate reduction from a top marginal rate of 35% to a flat rate of 21% provides significant tax savings for school bus companies. The reduction in individual tax rates, along with the addition of the 199A deduction, creates tax savings for bus companies operating as entities other than C-Corporations. The additional savings provides opportunities for school bus companies to retool their fleets by purchasing new buses, making repairs to the existing fleet and hiring additional drivers.
Q: How does Bonus Depreciation and Section 179 provide opportunities for school bus companies to reduce taxable income by purchasing new busses?
A: The TCJA updated its provisions for bonus depreciation so major asset purchases, with useful lives of 20 years or less, may be fully deducted in the year of purchase. This allows school bus companies to deduct 100% of the purchase price of school their buses. This applies to the purchase of either new or used school buses. There is also no limitation on the amount of bonus depreciation companies may take on buses purchased during the tax year.
Section 179 expensing is another option for fully expensing school bus purchases. Section 179 expensing is limited to a company’s taxable income, so it would apply if your bus company has made a lot of money or if the amount of bonus depreciation available to be used from asset purchases would significantly overrun income. In 2019, companies may expense up to $1,020,000 in new asset purchases under Section 179. The limit does not begin to phase out until greater than $2,550,000 of total assets are placed in service.
Q: How does tax reform impact deduction of interest expense?
A: Tax reform puts limitations in place for the net amount of business interest expense that can be deducted in a tax year. The limitation does not apply to school bus companies with average annual revenues of less than $25M for the past three tax years. For school bus companies with average annual revenues greater than $25M, business interest is limited to the sum of 30% of their adjusted taxable income, plus business interest income plus any floor plan financing interest. Any disallowed interest expense would carry over to the next tax year. It would then be treated as business interest paid or accrued in that year subject to the same limitations.
Q: Are there changes to the deductibility rules for meal and entertainment expenses?
A: There were revisions to the rules pertaining to the deductibility of meals and entertainment with tax reform. Prior to the passage of the TCJA, 50% of the cost of meals and entertainment were generally deductible for tax purposes with a few notable exceptions. Tax reform generally disallows tax deductions for costs associated with entertainment related to existing business contacts or prospective clients. The costs of meals themselves provided for business clients continue to be 50% deductible for tax purposes. This means it is important to document and segregate the costs of meals from the costs of entertainment. The provisions for meals that were 100% deductible prior to tax reform remain unchanged. This includes snacks provided for employees on the business premises, meals furnished for employee events (i.e. annual Christmas Parties) and meals furnished for the convenience of employers.
Q: What aspects of tax reform should school bus companies keep in mind when doing long-term tax planning?
A: The same tax savings opportunities from tax reform available in 2019 will likely remain in place for the next few years. Barring any changes by Congress to the existing law, the rules for 100% bonus depreciation do not begin to phase out until 2023. School bus companies still have a few years to fully deduct their bus purchases. Bonus depreciation is then slated to phase out by 20% each year until it completely phases out in 2027.
NOTE – MINNESOTA TAX LAW CONFORMITY
The Minnesota Legislature recently passed a tax bill conforming or partially conforming several Minnesota tax laws to changes made under prior Federal tax bills. However, complexities remain around Minnesota’s treatment of the tax reform.
It is important to work with a qualified advisor to help you leverage these opportunities. If you have questions about the changes or need assistance with a tax, accounting or audit issue, Smith Schafer & Associates can help. Our Transportation Group, comprised of numerous professionals, is committed to serving over 110 Minnesota transportation entities. Smith Schafer has the experience and understanding of the transportation industry to make a lasting positive difference in your future success.