As we pass the halfway point of 2023, it is time to consider how law changes will affect your business in the year-end to come and what items have changed from the previous year. In the past 5 years, there have been many law changes that have been enacted and expired that has made it difficult to stay up on the current tax landscape. Smith Schafer has a team of transportation experts ready to answer your questions. Here are a handful of common tax tips and items to be aware of that the transportation industry should take advantage of this year.
1. MEALS & ENTERTAINMENT
For the calendar years 2021 and 2022, taxpayers were temporarily allowed a 100 percent business expense deduction for meals. “Meals” is a term for expenses incurred in a restaurant but can be applied to similar expenses based on the situation.
In 2023, the meal expense treatment reverts to the law enacted under the Tax Cuts and Jobs Act (TCJA) of 2017. In this case, transportation company owners may deduct 50 percent of food and beverage related to operating a trade or business, with a couple of conditions:
- The expense is not lavish or extravagant under the circumstances.
- The taxpayer is present when the food or beverage expenses are incurred.
Entertainment, amusement, or recreation will continue to fall under the 100 percent nondeductible category.
Example: If a trucking company owner treats a current or potential business client, consultant, or other business contacts to a suite at a sporting event, such as a Twins game, the food, and beverage provided during this entertainment activity are 50% deductible. The cost of the food and beverage is separately stated from the cost of the entertainment on one or more bills, invoices, or receipts.
Exception to the Rule: Expenses related to business meetings for employees, stockholders, agents, or directors are fully deductible. Therefore, entertainment expenses related to meetings, activities, or events for the benefit of employees are fully deductible. This may include events such as shareholder meetings, holiday parties, and summer outings. If these events remain as COMPANY ONLY functions, these rules should apply.
2. PER DIEM METHODS FOR SUBSTANTIATING MEALS & LODGING EXPENSES
A transportation company owner must substantiate the amount, time, place, and business purpose of expenses paid or incurred while traveling away from home. The IRS has provided per diem allowances under which the amount of meals and incidental expenses (M&IE) may be deemed to be substantiated. The per diem allowances eliminate the need to substantiate actual costs. However, the owner, using the per diem allowances, still needs to have adequate records for documenting time, place, and business purpose.
Three per diem allowance methods:
- Lodging plus M&IE, which provides a per diem allowance to cover lodging as well as meals and incidental expenses.
- M&IE only, which provides a per diem allowance for meals and incidental expenses only.
- Incidental expenses only, which are used when no meal or lodging expenses are incurred.
Any reimbursement exceeding the relevant federal per diem rates for the type of allowance, must be included in the employee’s (or independent contractor’s) gross income and be reported on the employee’s form W-2, subject to withholding.
A per diem allowance for M&IE may only be used to substantiate an employee’s or other payee’s M&IEs for purposes of the employer’s return. The amount deemed to be substantiated is equal to the lesser of the per diem allowance or the amount computed at the federal M&IE rate for the locality of travel for the period that the employee is away from home. If M&IEs are substantiated using a per diem allowance, the entire amount is treated as a food and beverage expense, which is subject to any meals and entertainment deduction limitations.
3. ACCELERATED DEPRECIATION
As the current law stands, both new and used assets with a life of 20 years or less, will qualify for 80 percent bonus depreciation for the calendar year 2023. For the calendar years 2024 – 2026, bonus depreciation starts will reduce by 20 percent each year until there is no longer bonus depreciation. Transportation company owners may also elect to expense these purchases under Internal Revenue Code Section 179 (179). For 2023, owners may expense up to $1.16 million of new or used business assets. This limit is phased out once more than $2.8 million worth of assets are placed in service during the year. Code Section 179 expenses cannot exceed the taxable income of the business. Bonus depreciation does not have this stipulation.
Under current tax law, a benefit of taking advantage of 179 versus bonus depreciation is the state of Minnesota conforms to the federal treatment. Whereas, if bonus depreciation is used, part of the expense is disallowed for Minnesota purposes.
4. REPAIRS & MAINTENANCE
Expenses to keep tangible property in good working order that does not prolong the useful life of the asset are generally deductible as repair and maintenance costs. However, transportation company owners may elect to capitalize on certain repair expenses. If repair expenses qualify as an improvement expense, the expense must be capitalized.
Example: If a direct repair cost results in the betterment, restoration, or adaptation to a new or different use of the property, the expense should be capitalized.
5. DE MINIMIS EXPENSING SAFE HARBOR
A transportation company owner may make an election for a de minimis safe harbor expense to not capitalize amounts paid or incurred of no more than $2,500 during the tax year to acquire or produce a unit of tangible property. Amounts qualifying for the de minimis safe harbor may be currently deducted if they are otherwise deductible business expenses.
6. HEALTH INSURANCE EXPENSES
For S-Corporations, owner-employee taxpayers, who own more than 2 percent of the S-Corporation stock, may deduct 100 percent of the amount paid for medical insurance for himself or herself, a spouse, and dependents under the health plan established by the S-Corporation.
More than 2 percent of shareholders’ wages from an S-Corporation are treated as the shareholder’s earned income. A deduction for health insurance premiums may not exceed an individual’s earned income from the trade or business. Certain exceptions apply to group health plans.
7. NONDEDUCTIBLE EMPLOYEE EXPENSES
As accountants, we receive many questions about what employees can deduct as expenses. As the law stands, employees cannot take advantage of unreimbursed employee expenses due to the expiration of the 2 percent of adjusted gross income (AGI) itemized deductions. To clear confusion surrounding expenses related to transportation industry employees and aid employers in providing their employees with good information, below is expenses that CAN NOT be deducted by employees:
- Commuting expenses – to and from work from residence. Work to job-related site and back to work is eligible for deduction if the mileage or actual expense is not reimbursed by the employer.
- Everyday clothing – clothes required by work where no reimbursement is available are eligible for deduction.
- Local route meals – this does not include meals while “on the road” or part of travel away from home for work.
- Personal cell phone
- Personal trips – even with using a business-provided vehicle
- Reimbursed expenses
Note: In recognition of recent gasoline price increases, the IRS has raised the standard mileage rate for business travel to 65.5 cents per mile, up three cents from the rate effective at the end of 2022.
8. New Laws Enacted for 2023 and Beyond
In the last year, the two biggest laws enacted by Congress is the Inflation Reduction Act (IRA) of 2022 and the SECURE 2.0 Act which both came out in the fall and winter of 2022. Below is a general overview of what each law entailed, but in order to understand how each may affect your business, please consult your tax adviser.
The IRA’s main focus is on new federal spending toward reducing carbon emissions, lowering healthcare costs, funding the Internal Revenue Service, and improving taxpayer compliance. Many initiatives under this act do not directly affect the transportation industry. The most value can be found in the clean vehicle and clean energy credits that a transportation business may be able to take advantage of. A majority of these law changes begin in 2023.
The SECURE 2.0 Act was a new law that made sweeping changes to 401(k) plans – particularly plans sponsored by small businesses. It includes provisions intended to expand coverage, increase retirement savings, and simplify and clarify retirement plan rules. Many of these law changes began in 2023, but will take place over the next 5 to 10 years.
Questions about transportation industry tax strategies?
State tax laws may differ from the related Federal tax laws described above. Since there have been significant changes over the past year, it is important to find a qualified advisor to help you leverage these tax opportunities. Smith Schafer is a recognized leader in providing tax, accounting, auditing, and consulting services to the transportation industry since 1971. Our Transportation Group is committed to serving over 110 Minnesota transportation entities and stays on top of industry issues, trends, tools, and technologies to ensure we give you the best possible advice. For additional information, contact us. We look forward to speaking with you soon.