On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), also known as tax reform. This legislation made some of the most significant changes to the federal tax code since 1986.
Minnesota did not initially conform to the new federal legislation. On May 30, 2019, Governor Tim Walz signed a bill that retroactively adopted some tax reform changes, but there are areas of non-conformity. Understanding how Minnesota law now relates to tax reform and other federal tax bills has important implications for transportation companies that may affect their tax planning for the coming year.
This article highlights how the State of Minnesota is conforming to federal tax laws affecting the transportation industry.
- Tax reform increased the amount of expensing allowable for asset purchases under Section 179. Federal law allows assets to be expensed under Section 179 up to a limit of $1,040,000 for 2020. The deduction limitation begins to phase out when you reach $2,590,000 in asset purchases for the year. It is also important to note that expensing assets under Section 179 is limited to the amount of taxable income available. The Minnesota Legislature passed a limited tax bill during its October 2020 special session approving $208 million in tax relief by conforming to federal rules related to Section 179 expensing. Minnesota now shares the same maximum Section 179 deduction amount, phase out parameters, and taxable income limitations as federal law. Minnesota transportation businesses will now potentially be able to deduct up to $1,040,000 of asset additions in 2020 (subject to taxable income limitations) on their Minnesota tax return. In the past Minnesota transportation businesses were limited to an annual amount of $25,000 in Section 179 expensing with a phase out limitation of $200,000 in asset purchases. Minnesota required 80% of the amount expensed (in excess of $25,000) to be added back to Minnesota taxable income. The addback was then deducted in equal increments over the next five years.
- The TCJA modified the rules on bonus depreciation. Assets with a useful life of 20 years or less can be fully depreciated in the year of purchase. This means that transportation companies can fully deduct buses and other major equipment purchases. This applies to both new and used buses and equipment. There is no limitation on the amount of bonus deprecation that can be taken on assets purchased during the year. Minnesota does not conform to the federal rules for bonus depreciation. Eighty percent of the amount depreciated under the bonus depreciation rules is required to be added back to Minnesota taxable income. The remainder is subtracted from Minnesota taxable income in equal increments over the next five years.
- The rules for net operating losses were updated under the TCJA. Net operating losses primarily affect transportation companies who are C Corporations. Net operating losses generally do not pertain to Partnerships and S Corporation because they are flow-through entities. However, partners or shareholders of these entities can use their separate shares of net operating losses in calculating their taxable income. For tax years beginning January 1, 2018, and later, the TCJA allows C Corporations to carry forward net operating losses indefinitely until they are fully used up. The catch is that net operating losses beginning in 2018 are limited to 80 percent of taxable income. Before that, net operating losses could be carried forward 20 years to net against future profits or backward two years for an immediate refund of previous taxes paid. They could also be used to offset one hundred percent of taxable income versus the current eighty percent limitation in the past. Any net operating losses in years before 2018 are still subject to the old federal rules and can reduce federal taxable income to zero. Minnesota differs slightly in its rules on net operating losses. Even net operating losses in years before 2018 are limited to offsetting only 80 percent of taxable income. Therefore, it is possible for transportation companies with multiple years of net operating losses to completely offset their federal taxable income, but there may still be tax due in Minnesota.
- Minnesota conformed to tax reform in a few notable ways:
- The rules for like-kind exchanges changed effective January 1, 2018. Only real property now qualifies for the nonrecognition of gain or loss treatment in a like-kind exchange. Before the passage of the TCJA, personal property could be eligible for like-kind exchange treatment as well. This affects transportation companies because if a bus or van is traded in for a newer vehicle, gain or loss will have to be recognized on the disposal of the old vehicle instead of being deferred. This is true for both Federal and Minnesota tax treatment.
- Minnesota will conform to the TCJA rules on the business interest deduction limitation. Tax reform placed restrictions on the amount of business interest deducted on accumulated debt for companies with gross receipts of greater than $25 million. The amount of interest allowed as a deduction cannot exceed the following: taxable income plus interest, taxes, depreciation, and amortization times 30 percent. Floor plan financing interest (which applies primarily to dealers of motor vehicles) take on a slightly different calculation. Any disallowed interest is treated as interest paid in the following taxable year but still subject to the limitation rules for both Federal and Minnesota taxation.
- Minnesota conformed to the TCJA’s disallowance of entertainment expenses and partial allowance of costs related to meals. The TCJA disallows tax deductions for costs associated with entertainment related to existing business contacts and prospective clients. The prices of meals themselves provided for business clients continue to be 50 percent deductible for tax purposes. This means that it is crucial to document and segregate the costs of meals from entertainment costs. The provisions for meals that were 100 percent deductible before tax reform remain unchanged. This includes snacks provided for employees on the business premises, meals furnished for employee events (i.e., annual holiday parties), and meals furnished for employers’ convenience.
Minnesota has not enacted tax law changes in 2020 in response to federal changes under the following laws related to the COVID-19 pandemic:
- Coronavirus Aid, Relief, and Economic Security (CARES) Act
- Families First Coronavirus Response Act (FFCRA)
- Paycheck Protection Program Flexibility Act (PPPFA)
The impacts of federal tax bills can provide transportation companies with many tax savings opportunities. Tax planning is a vital component of a successful transportation business. Smith Schafer’s team will work closely with you to evaluate your situation and recommend the best approach to lower tax liability, maximize savings from allowable deductions and take advantage of available tax credits so you can focus on growing your business. Contact a Smith Schafer professional today to discuss your specific situation.