Transportation Companies: Tax Impacts of Entity Structures

Transportation Companies: Tax Impacts of Entity Structures

Choosing the right entity structure for your transportation business

One of the most important decisions you make for your transportation business is determining the legal entity structure because it directly impacts taxes and other liabilities. Choosing the right type of entity structure for your transportation business can be a complicated process. There are numerous factors going into making this decision.

It is critical to understand the business structure options available to you, the tax implications of each option and when each is most appropriate for your business. We provided a summary of the most common business structures a transportation business and the tax advantages and disadvantages of each.

Sole Proprietorship

This is one of the most common types of business entity structures. It is also the easiest to form and maintain, and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.

  • Tax Advantages
    • Income and expenses are included on the 1040 so there is no separate form to file.
    • Business losses may offset other income earned on the 1040.
  • Tax Disadvantages
    • You pay both the employee and employer portions of employment taxes on your self-employed income. This is typically 15.3%.
    • It is unincorporated, which means there is no legal separation between you and your business. Since you are personally responsible for your business’ liabilities, your personal assets may be at risk.

Corporation

A corporation receives a certificate of incorporation and is considered legally separate from owners. It is the most complex and expensive entity to create and maintain, but it offers the most protection of all entities.

  • Tax Advantages
    • Owners avoid any personal liability and personal assets are not at risk.
    • Currently, corporations have a flat tax rate of 21%. This tax is paid at the corporate level, with no corporate tax paid by owners.
  • Tax Disadvantages
    • Any earnings distributed to shareholders are taxed at individual tax rates on the shareholder’s individual tax return. This leads to double taxation of the same earnings – once at the corporate level and again at the individual level.

S Corporation

One way to avoid the double taxation of a corporation is to elect to be taxed as an S Corporation.  An S Corporation has several appealing tax benefits and provides business owners with the liability protection of a corporation.

  • Tax Advantages
    • Income and losses are passed through to shareholders and included on their individual tax returns.  There is no tax paid at the corporate level.
    • An S Corporation may be eligible for a qualified business income deduction of up to 20% of qualified business income.
  • Tax Disadvantages
    • Since income is taxed at the individual level, the tax rate may be higher than the flat corporate tax rate of 21%.
    • S Corporation shareholders must be paid reasonable wages, which generally means wages are comparable to what would be paid to someone else to do the same job. This results in additional taxable income to the individual, plus an additional expense in the form of wages and payroll taxes for the corporation.

Limited Liability Company (LLC)

An LLC is a popular entity structure for small to medium-sized transportation businesses. It is a form of a partnership allowing owners to limit personal liabilities. LLCs were created to provide business owners with the liability protection that corporations benefit from, without the burden of double taxation.

  • Tax Advantages
    • Income and losses are passed through to the partners and included on their individual tax returns. There is no tax paid at the entity level.
    • An LLC may be eligible for a qualified business income deduction of up to 20% of qualified business income.
  • Tax Disadvantages
    • You pay BOTH the employee and employer portions of employment taxes on your self-employed income. This is typically 15.3%.

Questions?

There are several factors you should consider when selecting an entity structure for your transportation business – liability, tax implications, cost of formation and ongoing administration, flexibility and control. With the recent Tax Reform, taxation has been brought to the forefront in making and rethinking this decision for transportation business owners.

If you are planning to start a new transportation business, you will need to decide what type of entity structure you want. As discussed, there are several advantages and disadvantages to each entity so it is important you do your research and contact a professional with experience. If you are an established transportation business, the Smith Schafer team can analyze your situation, advise you on the advantages and disadvantages of each option and provide a structure analysis.

Partner with an experienced team of cpas to help you create saving opportunities both now and in the future. Contact us today to schedule a consultation about your transportation business.

Retirement & Estate Planning Guide for Transportation Business Owners

Retirement & Estate Planning Guide for Transportation Business Owners

As a business owner, you have a lot of responsibilities – budgeting, marketing, selling, and countless other tasks. It is easy to put your own financial plans on the back burner for the sake of growing the business. But it is important for you to have a personal financial plan and to ensure it takes into account the unique considerations and opportunities of owning a business. Below are seven basic tips to start creating your personal financial plan:

1. Save for your own retirement.

The right retirement plan allows you to maximize your retirement savings, while also benefiting your transportation company and employees.

  • Example: You could implement a safe harbor 401(k) plan for your transportation company. This type of plan requires the company to contribute to employees’ savings accounts.  These contributions by the company are completely tax deductible. In addition, a safe harbor 401(k) plan automatically passes annual compliance testing, which will allow you as an owner to maximize your contributions to the plan.

A retirement plan only helps your retirement savings IF you choose to contribute to it. We recommend you maximize your contributions, or at least contribute enough to maximize your company’s matching funds. If you have a 401(k) plan, you can contribute up to $19,000 to it in 2019 (plus another $6,000 if you are over 50). 

2. Create key estate planning documents.

The first step to estate planning is to start with the documents:

  • Will
  • Power of attorney
  • Healthcare directive

Ensure these documents address what happens to your transportation business in the case of your death or disability. Well-executed estate planning documents ensure someone you trust inherits the business or manages business transactions on your behalf.

3. Purchase life and disability insurance.

As a business owner, you should have life and disability insurance policies naming the business as a beneficiary. This will guarantee an income stream to help keep the business operating in your absence.

4. Have a buy-sell agreement.

If your transportation business has multiple owners, you should have a buy-sell agreement in place. Buy-sell agreements specify who can buy an owner’s shares of the business, under what conditions, and at what price. Having this agreement in place now may reduce conflict and potential costs when a business owner exits the business.

5. Create a succession plan.

After completing basic estate planning documents, we recommend creating a succession plan. This lays out, in detail, how the business will prepare for a transition in ownership. If your succession plan includes transferring the business to a family member or key employee, it could be beneficial to start that transfer now.

In 2019, you are allowed to gift up to $15,000 to an individual without incurring a gift tax liability.  If you and your spouse own the business, each of you can gift $15,000. Likewise, if you are transferring the business to an individual and his or her spouse, you can gift each of them $15,000.  Transferring your transportation business this way allows you to transfer a significant portion of your business without any gift or estate tax liabilities.

6. Discuss your plans.

Once you have an estate or succession plan in place, make sure you discuss them with all parties affected. These may be hard conversations, but they are imperative to ensure everyone knows what is at stake. This can help avoid conflict and disappointment later.

7. Review and update your plans regularly.

Finally, you should review your plans regularly and update them as necessary. You may have a new family member or a key employee leave your organization. These things can drastically change your retirement, estate or succession plans. In addition, tax laws are constantly changing, so something that is tax advantageous in one year may not be in a different year. It is important your plan is always up-to-date to reflect your wishes.

Need Help?

Your future can be more secure with the help of a Smith Schafer advisor. We can help you determine the appropriate immediate and long-term retirement and estate planning strategies. The sooner you start planning, the better. We can help with:

  • Review Wills, Trusts & Retirement Plans
  • Asset Restructure
  • Estimate Estate Taxes
  • Identify Tax Savings
  • Succession Planning
  • Valuations
  • Gifting
  • Wealth Management

Sales Tax Implications for the Transportation Industry

Sales Tax Implications for the Transportation Industry

The transport of people and products often have varying considerations when it comes to state sales tax implications. Sales tax is assessed on some items, but not others. The summary outlined below covers some of the more typical items in general commerce involving the transportation industry.

Passenger Transportation Services

Companies performing services within the transportation industry are afforded a number of tax-favorable benefits. One of which is a specific exemption related to passenger transportation. Passenger transportation services transport people to places. Under Minnesota Statutes 297B.03 and 297A.90, fees charged to transport passengers are not taxable for Minnesota sales tax purposes.

A person who is engaged in for-hire transportation of passengers by motor vehicle may register as a retailer, however, an exemption is available that limits their potential sales tax exposure.

Examples of exemptions for passenger transportation include the following:

  • Aircraft
  • Bus
  • Ferry
  • Light rail
  • Limousine
  • Taxicab and ride share services
  • Train

Parking and Transportation Services

When parking and transportation services are sold together for one combined fee, the entire sale is subject to sales tax even though the transportation by itself is a nontaxable service. When sold together, the transportation service is taxable because it is necessary to complete the sale of the parking service.

Common Carrier Services

Common carriers are hired to transport goods from point A to point B. The fees charged to provide these services are generally not taxable. Common carriers often transport goods by air, ship, tractor-trailer, train and/or truck. However, the transport of aggregate materials (i.e. gravel, concrete, asphalt, etc.) may still have sales tax consequences.

Delivery Charges

Delivery charges are charges by the seller for preparation and delivery of personal property or services to a location designated by the purchaser, including, but not limited to, transportation, shipping, postage, handling, crating and packing.

If the item being sold is taxable, charges by the seller to deliver it would also be taxable. Delivery charges are part of the sale price of the item, even if separately stated. Delivery services furnished and billed by a third party are not taxable except when delivering aggregate materials or concrete block.
 

Transportation has been a key practice area of Smith Schafer’s for more than 45 years. For more information on tax strategies that may benefit your transportation business, contact the Smith Schafer Transportation Team. We look forward to speaking with you soon.

Benchmarking: Transportation Industry

Benchmarking: Transportation Industry

Is your transportation company performing as well as its industry peers? You reviewed your financial statements from your accountant and you are making money. That is great, but what else are the numbers on the paper telling you?

Utilizing benchmarks is an easy way to determine how well your transportation company compares to others in your industry. Below are benchmarks regarding five major subgroups in the transportation industry:

  • Public School Bus Services
  • Chartered Bus Services
  • Local Freight Trucking
  • Long-Distance Freight Trucking
  • Airport Operations

Every transportation company is unique and the below standards will not apply to all. These metrics should be used as a guideline. Statistics and information was provided from the IBISWorld Industry Reports, June 2018.


Public School Bus Services

  • Profits are expected to average 7.2% of earnings before interest and taxes for school bus operators. This is dependent on company size. For example, larger school bus companies have profit margins closer to 10.0% due to economies of scale. In recent years, profit margins should be climbing slightly due to lower fuels costs.
  • Wages represent the most significant cost for industry operators. Due to the labor-intensive nature of the industry, operators can expect to see wages near 46.2% of total revenues.
  • Purchases and fuel are another large cost of the transportation industry. With acquisition of buses, leasing, and licensing, 27.8% of revenues can be accounted for through purchases. School buses can range from $65,000 to $85,000, with newer, more technologically advanced buses even reaching up to $185,000. Assuming an average of 7.0 miles per gallon for a school bus, we can estimate roughly 1,700 gallons of gasoline are used each year (average 12,000 miles driven). Fuel can be anywhere between 20% and 30% (5.56% to 8.34% of total revenues) of your total purchase expenses.
  • Depreciation costs average 9.7% of total revenues. This number has decreased over the past five years due to increased investments into software that helps to track vehicles, verify inspections, and track and manage fuel consumption rates. This information can help to extend the life of capital investments, such as buses.

Chartered Bus Services

  • Profits (earnings before interest and taxes) average 6.4% of revenues. Flexibility in the economy’s disposable spending and increasingly popular and inexpensive curbside lines have caused growth over the past five years for chartered bus services.
  • Purchases are the industry’s second largest expense behind wages. Averaging 15.7% of revenues, a majority of this expense category lies in gasoline purchases. Smaller companies tend to feel the impact of changing fuel prices versus their larger counter-parts.  Typically, this difference is due to larger companies having the resources to purchase fuel in bulk, or enter in forward purchase contracts.
  • Wages, the largest cost for companies, average 33.7%. This cost segment varies largely between company sizes. For instance, workers in traditional scheduled bus service positions usually belong to a union, which can help to increase their wage negotiating power.

Local Freight Trucking

  • Profits are typically low in this industry due to the competitive nature. Most trucking companies in this industry are non-employers that operate with extremely thin margins.  Profit as a percentage of revenues averages 6.7% for the industry.
  • Wages represent the largest individual expense at 30.9% of revenues. With labor being an essential component of this industry, companies can expect to see wages follow trends in overall demand for services.
  • Purchases average 32.2% of revenues with fuel-related expenses making up the majority of this category. Fluctuations in fuel costs impact this category most often. As prices increase, profit margins thin, with only slight relief to larger employers whom have fuel surcharges in place.
  • Rent and utilities in this industry can account for 5.0% revenue. It is typical of companies in this industry to rent and operate warehouses and distribution centers.
  • Depreciation is a given in this industry. Roughly 4.6% of revenues can be allocated to depreciation to account for every truck and trailer a company owns.
  • Marketing is minimal at 0.2% of revenues. In many cases, operators conduct business through freight brokers or through existing long-standing relationships. Marketing campaigns direct-to-consumer are rarely used.

Long-Distance Freight Trucking

  • Profit in this industry is relatively low at 5.9% of revenues. This is up from 4.9% in 2014.  Companies are constantly competing on prices to win business, which ultimately hurts profits. The prices of diesel over the past 5 years explains the jump in profit margins.
  • Fuel and purchases are expected to rise as the price of diesel is anticipated to increase again over the next 5 years. However, with a strengthening economy and an increase in demand for services, negative impact on profit margins from fuel costs could be offset slightly. Fuel and purchases on average account for 29.1% of revenues.
  • Maintenance and other costs average 9.9% of revenues. These costs typically include upkeep on trucks, trailers, and containers. 
  • Depreciation costs have grown to 6.9% over the past five years as demand for more technologically advanced and fuel-efficient vehicles has increased.
  • Rent and utilities make up 17.6% of revenues. This category not only would include warehouses and distribution centers, but cost of electricity as well as truck or trailer rentals.  Lease-to-own financing on truck purchases are included in this segment of expenses.

Airport Operations

  • Wages and other labor expenses represent the largest expense in an airport operators cost structure. Worker role ranges from air traffic controllers, security guards, engineers, and maintenance workers to managers and even a police force in some cases. Wages average 36.5% of revenues.
  • Purchases represent roughly 10.4% of revenues. Operators in this industry often need specialized equipment for things such as aircraft refueling, maintenance, cargo and baggage, ferrying, and other services. 
  • Profits average roughly 6.0% of revenues, up from 4.7% in 2014.
  • Depreciation costs are a substantial cost for airport operators, averaging around 33.7%. The construction and operation of an airport requires substantial capital investment into things such as a runway, terminal, hangar, and communications equipment.

Questions?

To bring you innovative solutions, our Transportation Group stays on top of industry benchmarking, trends, tools and technologies to ensure we give you the best possible advice. Smith Schafer professionals have serviced the transportation industry since 1971 and is committed to serving over 110 Minnesota transportation entities. We take great pride in consulting on various industry specific issues, as well as the broader needs of these companies and their owners.

Why do you Need a CPA Specialized in the Transportation Industry?

Why do you Need a CPA Specialized in the Transportation Industry?

“I have worked with Smith Schafer directly and indirectly since 1979. I’ve always felt comfortable and confident in the work they do. Smith Schafer knows the law, the regulations and the rules that support our business.”

Bruce Dischinger, Former VP & COO of Minnesota Coaches Group

With a hiring shortage, rising fuel costs and increased competition challenging the transportation industry, the knowledge and experience of your CPA makes a difference. Transportation businesses, including trucking, school bus, motor coach and aircraft, often face complex challenges not encountered in other industries. Managing the demands of a large fleet including drivers, safety and compliance, and the maintenance of new trucks and other equipment can be quite complicated. To stay competitive, transportation companies need look for every advantage possible to win new business, reduce expenses and increase service levels.

Our industry experts stay on top of changing trends and leverage years of experience, relationships, and continuing education. Smith Schafer’s transportation specialization allows us to stay on the leading edge of industry developments, regulations and opportunities, and permits us to efficiently and effectively provide services tailored to our client’s needs. A CPA who understands your business and the industry can act as a valuable consultant on items such as succession planning, business valuations, bookkeeping and much more. This level of specialization makes us uniquely qualified to provide the high-quality services that our transportation industry clients expect and deserve to receive.

Why a CPA?

CPAs are trusted professionals offering high-level analysis and long-view recommendations encompassing every detail of a financial picture. CPAs have passed a rigorous examination and have met high standards of education. The American Institute of CPAs works to protect the public interest and the organization certifies these individuals are able to perform their duties in a professional manner. The CPA designation is extremely difficult to acquire and is a way for the financial industry to identify the right people to handle important financial matters.

A CPA professional working with the transportation industry should be fully immersed in the arena. There is no substitute for industry-specific knowledge and understanding. Whether it’s negotiating fuel surcharges or dealing with leasing sales tax and fleet maintenance, Smith Schafer has the experience and understanding of the transportation industry to make a lasting positive difference in your future success. Our Transportation Group, comprised of numerous professionals, is committed to serving over 110 Minnesota transportation entities. Partner with an experienced team of CPAs to help you create saving opportunities both now and in the future. 

Transportation Industry: Tips to Managing your Fleet & Saving Money

Transportation Industry: Tips to Managing your Fleet & Saving Money

Whether your transportation company has one or dozens of vehicles on the road, smart management can save you money. Familiarity with tax laws, simple maintenance steps, and high-tech solutions can reduce the costs of operating your fleet and keep it safer.

START WITH TAXES

One of the best ways to save money is to spend some time with financial and accounting professionals. Deductions make a major difference in the cost of operating a fleet. Smith Schafer has the experience and understanding of the transportation industry to make a positive difference in your future success. Our Transportation Group, comprised of numerous professionals, is committed to serving over 100 Minnesota transportation entities.

Depreciation

  • Depreciation deductions are allowed on vehicles used for business purposes, including passenger cars, light trucks, and vans.
  • The various rules surrounding depreciation can be complex, but Smith Schafer professionals are here to help you simplify your options.

Operating Costs

  • Routine operating costs deductible to the extent of their business-use percentage.
  • These costs typically include:
    • Gasoline
    • Oil
    • Maintenance
    • Insurance
    • Registration and License fees

Leases

  • Monthly lease payments are deductible to the extent of their business-use percentage.
  • Limitations apply to certain passenger cars, light trucks, and vans.
  • Operating costs of leased vehicles are also deductible to the extent of their business-use percentage.

Mileage

  • Whether you buy or lease, it is important to keep good records of business miles driven for tax purposes.

Beyond tax savings, simple maintenance can keep your costs down and your safety record up. Here are five tips to managing your fleet:

  1. Tires
    • Check the air pressure of your tires daily when they are cold and fill if necessary. Low air pressure causes stress and irregular wear that can result in loss of control.
    • Inspect tires every 30 days for wear and evidence that the suspension isn’t aligned properly.
    • Rotate tires regularly to help achieve more uniform wear. The guideline for tire rotation is approximately every 6,000 miles.
  2. Gas
    • Avoid premium gasoline unless necessary. If your vehicles do not specifically require an upgraded fuel, buy regular unleaded.
  3. Maintenance
    • Shop around when you hire out routine maintenance. Costs can vary as much as 50% depending on which shop you use. Consider doing in-house maintenance. Your business can be more productive if your vehicles continue to run during normal hours and are serviced by staff mechanics after hours.
  4. Insurance
    • Keep your fleet in a garage or parked under a carport. As a result, it will help keep them in better condition and if garaged, may lower your insurance cost.
    • Shop for insurance. Re-bid your insurance policy to make sure you’re getting the best deal.
  5. Safety
    • Encourage safety. Run a motor vehicle report on every driver in the company. Revoke driving privileges for those with multiple infractions. Consider rewarding those with good records.

Questions?

What’s driving your business? You should have an advisor on your side to take a tax efficient, customer-centric approach to managing the top and bottom line and everything in between. Transportation has been a key practice area of ours since 1971. Contact us today to learn more about how we can help while providing accurate, timely and professional financial advice.