Many growing transportation companies struggle to create well-tuned accounting processes, especially as systems need to change to support increased activity. We have provided the guide below to help transportation companies better understand some basic accounting procedures:
1. ACCOUNTING METHOD
There are two principal options for accounting for revenue and expenses:
- the cash method
- the accrual method
The cash method of accounting is exactly as it sounds – revenue is recorded when cash is received, and expenses are recorded when cash is spent. This is the simplest accounting method. However, it does not always give a complete and accurate picture of a company’s operations.
Example: A large job is completed in December 2018, but payment is not received until January 2019; expenses related to the job were paid in 2018. Using the cash method of accounting, the revenue will be recorded when payment is received in January 2019 and expenses recorded in 2018 when paid.
Under the accrual method of accounting, revenue is recognized when it is earned, regardless of when the cash is received and expenses are accrued even if not yet paid. The accrual method of accounting provides a more complete and accurate picture of a company’s operations and matches the expenses to the same period as the revenue.
Tip: If a third party, such as a bank or bonding company, is requiring a transportation company to have CPA-prepared financial statements, inquire about the method of accounting they prefer.
2. FUEL AND PARTS INVENTORY
Inventory is often associated with retail businesses and is generally a product to be sold to customers. However, transportation companies may also have inventory but it’s in the form of products consumed in the production of services. These may include fuel, parts and other supplies. Under the accrual method of accounting described above, inventory is an asset to the company and is not recorded as an expense until it is used.
3. LEASING ASSETS VS. BUYING
Many factors are involved when deciding between leasing a piece of equipment or purchasing the equipment. Leasing equipment has predictable payments that are typically 100 percent deductible as an operating expense. Generally, companies do not pay for maintenance on leased equipment. However, companies are charged interest as a component of the lease payment. This interest results in an overall higher cost than an outright purchase.
When purchasing an asset the overall cost may be lower but this transaction generally requires a higher initial cash outlay at the time of purchase. In a purchase situation, the transportation companies have complete control over the asset.
4. TAX CONSIDERATIONS
There are two major tax considerations specific to transportation companies.
- Meals provided to employees. The general rule is a company may deduct 50 percent of business-related meal expenses. However, transportation companies receive a higher deduction. Employers can deduct 80 percent of the cost of meals provided to employees whose work is subject to U.S. Department of Transportation hours-of-service limitations.
- Credit for taxes paid on fuel. The government essentially taxes all fuel purchases, but then allows a credit for nontaxable uses of this fuel. Nontaxable uses include, but are not limited to, farming, off-highway business, such as refer fuel, use and transporting students. In order to claim the credit, a Form 4136 must be completed with the tax return. A tax credit reduces income tax dollar for dollar. Whereas a tax deduction reduces your income subject to tax. For example, a Form 4136 is completed and calculated at a $1,000 credit, income tax is reduced $1,000.
Need help managing the daily routine?
Transportation company owners manage and balance many duties including the accounting department. One strategy to reduce the burden is to hire additional staff. This strategy can be ineffective without the proper expertise, oversight and guidance. Smith Schafer offers customizable accounting services. Whether you need help managing the daily routine or assistance with more strategic decisions, such as software analysis and selection, our accounting professionals can give you back valuable time and resources so you can focus on growing your transportation company.
Contact us today to learn more about how we can help while providing accurate, timely and professional financial advice.
Businesses in the transportation industry often face complex challenges not encountered by other companies. 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 look for every advantage possible to win new business, reduce expenses and increase service levels. The good news is the Tax Cut and Jobs Act of 2017, more commonly known as tax reform, ushered in several changes which will benefit transportation companies.
Prime examples include a reduction in business tax rates, changes to pass through entity taxes and expanded Section 179d expensing. There are several additional changes will can benefit transportation industry businesses in 2018 and beyond. To help clients, prospects and others understand the changes and corresponding benefits, we have provided a summary of key points below.
Key Tax Reform Changes
- Pass-Through Entity Taxation – Under prior laws, pass through entity owners had to pay tax on company earnings at their individual tax rate – often 39.6%. The new law allows qualifying pass through entities to receive a 20% deduction on pass-through income for tax years beginning after 12/31/17 and ending in 2025.
- Enhanced Section 179d Expensing – Tax reform has changed Section 179d expensing limits to allow companies to deduct up to $1M of the cost of qualifying property placed into service during the year. Beyond this, a business owner may purchase up to $2.5M (increased from $2.0M) in qualifying business property before the benefits are phased out.
- Luxury Auto Depreciation Limits – Under the new tax law, vehicles placed into service after December 31, 2017, weighing 6,000 pounds or less, have a new maximum deprecation limit of $10,000 in year one. If a company can claim bonus depreciation, then the possible limit is increased by $8,000 to $18,000. The limits also change in year two to $16,000, year 3 to $9,600 and in year 4 and beyond to $5,760. Vehicles that are over 6,000 pounds are not subject to these limits and are eligible for bonus depreciation if acquired and place into service after September 27, 2017. For Section 179, the limitation of $25,000 is still in place for SUVs.
- Immediate 100% Expensing – Companies will now be able to fully expense certain capital expenditures instead of depreciating them over several years, starting with business assets placed in service after September 27, 2017. There is no limit to the amount that can be expensed, but the percentage of allowable expensing will be phased out at a rate of 20% per year from 2023 (80%) to 2026 (20%). This immediate tax benefit is likely to encourage more capital spending, potentially enabling fleet upgrades and expansion for trucking and bus companies as well as others in the industry.
- Entertainment Deduction Repealed – Under previous rules, companies could deduct 50% for a variety of expenses, such as client meals, event tickets, charitable event tickets and membership fees. The new law eliminates deductions for entertainment, amusement, recreation, and club membership dues. This applies even for expenses directly related to the active conduct of a taxpayer’s trade or business.
- Limited Business Interest Expense Deduction – The deduction for net interest expenses incurred by a business will now be limited to 30% of its adjusted taxable income – or earnings before interest, taxes, depreciation and amortization. Businesses with average annual gross receipts of $25 million or less are exempt from the limit. This new rule will have the greatest impact on companies that carry a higher amount of debt
- Excess Business Loss – Starting in 2018 excess business loss of a taxpayer other than a C corporation is limited. Net business loss of $250,000 (or $500,000 in the case of a joint return) will not be deductible in the current year. However, an excess business loss is treated as part of the taxpayer’s net operating loss and can be carried forward to subsequent years.
The new tax reform offers many changes that will benefit transportation companies. Since there have been significant changes over the past year, it’s 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.
The Tax Cuts and Jobs Act (TCJA) tax reform has left many taxpayers confused about what is and what is not deductible for the upcoming 2018 tax year. Smith Schafer has a team of transportation experts ready to answer your questions. Below are some common deductions the transportation industry may see this year:
1. MEALS & ENTERTAINMENT
Under the TCJA, transportation company owners may deduct 50 percent of food and beverage related to operating a trade or business, with a couple conditions:
- The expense is not lavish or extravagant under the circumstances.
- The taxpayer is present when the food or beverages are furnished.
Note: Expenses related to entertainment, amusement, or recreation no longer fall under the 50 percent deduction. The Internal Revenue Service (IRS) will not allow the entertainment disallowance rule to be circumvented through inflation of food and beverage costs.
Example: If a trucking company owner treats a current or potential business client, consultant, or other business contact to a suite at a sporting event, such as a Vikings game, the food and beverage provided during this entertainment activity is deductible. The cost of the food and beverage is stated separately 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. As long as 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 travelling 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 is 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 the 50 percent limitation on meals and entertainment.
3. ACCELERATED DEPRECIATION
Under TCJA, the purchase on or after September 27, 2017 of qualifying assets, both new and used, with an asset life of 20 years or less, will qualify for 100 percent bonus depreciation. Transportation company owners may also elect to expense these purchases under Code Section 179. Owners may expense up to $1 million of new or used business assets. This limit is phased-out once more than $2.5 million worth of assets are placed in service during the year. Code Section 179 expenses cannot exceed taxable income of the business. Bonus depreciation does not have this stipulation.
4. REPAIRS & MAINTENANCE
Expenses to keep tangible property in good working order that do not prolong the useful life of the asset are generally deductible as repair and maintenance costs. However, transportation company owners may elect to capitalize 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.
A more than 2 percent shareholder’s 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.
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 work with 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 80 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, click here to contact us. We look forward to speaking with you soon.
Over the past 45 years, we have dealt with several IRS audits involving the fuel tax credit claimed by our bus company clients.
BELOW ARE FREQUENTLY ASKED QUESTIONS WE HEAR FROM BUS COMPANY OWNERS:
Q: What fuel and what vehicles qualify for the fuel tax credit?
A: Gasoline and diesel fuel used in school buses and qualified local buses qualify.
Q: What is the definition of a school bus and a qualified local bus for fuel tax credit purposes?
A: Many states have their own definition for what is a school bus. For example, Minnesota’s definition of a school bus is published under Minnesota statute 169.011 subdivision 71. However, the federal fuel tax credit does not use a state s
tatute for their definition.
The Federal statute does not give a specific definition as to what a school bus is. However, over the years, it has become apparent that the bus looking vehicle with accordion doors is the starting point. The fuel tax credit is available for vehicles registered as a school bus with the state where the vehicle is licensed.
The school bus fuel tax credit is not available for traditional passenger vehicles, such as mini vans or other automobiles registered as a van or private automobile. The smaller vehicles must be modified by installing the accordion doors and other safety modifications, in order to qualify for the fuel tax credit. For example, a standard Dodge Grand Caravan painted yellow is not a school bus for federal fuel tax purposes.
Note: the publications do not define the fuel credit as available for fuel used in any vehicle used to transport school students; it specifically says bus (school bus). “In a school bus means fuel used in a bus engaged in the transportation of students or employees of schools.”
In a qualified local bus means fuel used in a bus meeting all the following requirements:
- It is engaged in furnishing (for compensation) intracity passenger land transportation available to the general public.
- It operates along scheduled, regular routes.
- It has a seating capacity of at least 20 adults (excluding the driver).
- It is under contract with (or is receiving more than a nominal subsidy from) any state or local government to furnish the transportation.
We have several clients using traditional automobiles for the services to transport students. We have not taken fuel tax credit for school transportation on traditional automobiles, but do for school buses and qualified local buses.
Q: What is the difference between a qualified local bus and a school bus?
A: A qualified local bus is eligible for the fuel tax credit when it is a vehicle other than a traditional school bus and is used to transport people. A school bus is generally the traditional “yellow bus” which has the distinctive accordion doors and school bus safety features you would recognize such as a 65 or 77 passenger school bus. A qualified local bus is a bus which does not qualify as a school bus, but has a seating capacity of at least 20 adults excluding the driver.
Q: What information is needed?
A: We begin each year by asking our clients about the gasoline gallons and then the diesel gallons used during the prior year in their school buses, what we call a “yellow bus.” Then we ask the same question for their qualified local bus fuel usage.
Q: Why do the gallons and type of fuel matter?
A: There are different rates of fuel tax credit available based upon if the vehicle is a school bus or a qualified local bus and the type of fuel used.
Q: Do you need a vehicle fueling log and/or receipts to obtain credit?
A: As we have gone through the audits over the years, the IRS has asked for a listing of the company vehicles, the fuel type and the seating capacity of each. If there are vehicles other than school buses or if qualified local buses that may have used fuel out of the tanks at the terminal, fuel cards or logs by vehicle have been asked for. The process typically includes providing fuel invoices from bulk deliveries plus fuel receipts for fuel purchased at the pump to prove that federal fuel taxes have been paid and reconciling the gallons claimed as a fuel tax credit against the total gallons purchased.
Q: How do I claim the fuel tax credit? What is the deadline for filing a claim?
A: Generally, the filing is done annually along with your company’s business income taxes using Form 4136 (for tax credits), but you may also file annually on fuel and any other applicable excise taxes (for rebate payments) using Form 8849 along with the appropriate attachment (schedule 1 in your case). If you want to file quarterly you can use Form 720.
Transportation has been a key practice area of Smith Schafer’s for more than 45 years. We have qualified professionals to assist you with identifying and claiming these credits. For more information on tax strategies that may benefit your business contact the Smith Schafer Transportation Team.We look forward to speaking with you soon.
The new lease accounting rules will have a significant impact on the financial statements of transportation companies leasing real property, equipment, vehicles and other fixed assets. The new lease rules apply to all leases with a term of more than one year and go into effect for nonpublic companies with fiscal years beginning after December 15, 2019. Below are five ways the new lease rules may affect transportation companies:
1. Existing leases will present differently.
Under the current rules, many leases are recorded only as rent expense on a transportation company’s income statement. However, under the new rules, lessees will be required to record an asset and corresponding liability for substantially all leased property.
2. Existing leases will be incorporated in the change.
The terms of current leases are more than likely going to continue into 2019 and beyond, meaning every lease entered into is going to be presented differently on future financial statements.
3. Current loan agreements will be affected by the change.
Banking relationships are important to transportation companies. Agreeing to loan covenants now, without understanding how this standard is going to affect a transportation company’s financial statements, may put a strain on this relationship that could be avoided.
4. Buy versus lease decisions on equipment could change.
Many factors are involved when deciding between leasing a piece of equipment or purchasing the equipment out right. If showing debt on the balance sheet is a consideration, this will need to be re-evaluated to verify how the lease will be presented in the future.
5. Comparative statements need to be calculated.
The standard needs to be implemented for the earliest period presented, which will require calculations and new presentation for all years presented. Transportation companies should determine if the bank requires comparative statements. Single year presentation will remove a year of lease liability calculations and restatement, which may save time and money, but may reduce the usefulness of the statements.
The best way for your transportation company to prepare for the new lease accounting rules is to plan ahead. Below are three things your transportation company should be doing now to prepare:
1. Identify and classify leases.
Review all existing lease and rental contracts and create an inventory list, including rent, interest rates and security deposits. Lease documents will become a necessary item for accounting professionals, so start collecting and retaining these documents now.
2. Educate transportation company’s banker.
Educate investors about the new lease accounting rules and how they impact financial statements. Ensure they know what to expect in future financial statements.
3. Consider purchasing equipment before the end of the year.
If there are plans to enter into a new lease for equipment, consider purchasing it instead. For 2018, the section 179 depreciation deduction is generally $1,000,000 and the bonus depreciation rate is 100 percent.
Implementation of new lease accounting rules may be a relatively simple process with the help of a CPA with an expertise in your industry. Smith Schafer is a recognized leader in providing accounting, auditing and consulting services to the transportation industry since 1971. Our Transportation Group is committed to serving over 80 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 details on the new lease accounting rules or to learn more about how we can help, please contact a Smith Schafer professional.
Does your transportation company’s retirement plan require an audit? An audit is required under federal law to ensure the plan functions, operations and processes are in compliance with established regulations. To help transportation companies streamline their employee retirement plan audit process, we have provided a Q&A summary below to help companies prepare for their employee retirement plan audit.
Q: WHO NEEDS AN EMPLOYEE RETIREMENT PLAN AUDIT?
A: According to the Department of Labor, if the number of qualified employees has changed in the last year, the rules governing the employee Retirement plan may require changes, too. An employee Retirement plan audit is generally required if your transportation company has more than 100 eligible participants on the first day of the plan year.
The plans that may require an audit include:
- Profit sharing plans
- Defined contribution plans
- Defined Retirement plans
Q: WHY DO YOU NEED AN AUDIT?
A: Large plans must complete Schedule H with the Form 5500 Annual Report and are required to have an audit. Small plans must complete Schedule I with the Form 5500 and are not required to have an audit.
There is an exception to this called the 80-120 Rule. This rule allows a plan with between 80 and 120 participants to be classified the same way it was classified in the prior year. For example, if a plan had 95 participants at the beginning of 2017, it would have been considered a small plan for 2017. If at the beginning of 2018, the same plan had 110 participants, the plan could elect to still be considered a small plan.
The participant count used to make these determinations includes all employees who are eligible to participate in the plan, regardless of participation. It also includes all participants who have separated employment, but still have a balance within the plan.
Your plan’s third party administrator (TPA) should inform you when an audit is required. However, if you believe you are close to being considered a large plan, you should review your plan activity and contact your TPA sooner rather than later.
Q: HOW DO YOU SELECT AN EMPLOYEE RETIREMENT PLAN AUDITOR?
A: Once it has been determined that your transportation company needs an audit, the first step is to select an independent CPA firm to perform the audit. It is important to select a firm with the necessary skills and retirement plan experience to provide the services your plan needs.
It may seem like an easy solution to use the CPA firm you use for your corporate accounting needs. However, that firm may not have the required skill or expertise to audit your retirement plan effectively and efficiently. It is worth the extra effort to find a firm that will provide the results your plan needs.
Q: HOW DO YOU PREPARE FOR AN EMPLOYEE RETIREMENT PLAN AUDIT?
A: The purpose of a retirement plan audit is to test financial information and compliance with plan documents and regulations. During the audit, your auditors will review your plan’s records and transactions, and may ask for additional documentation to support any of the transactions. Some of the areas tested during the audit include:
- Contributions – employee and employer, if applicable
- Participant data and accounts
- Loans, if applicable
One of the focal areas of any retirement plan audit is the review of personnel files. Before your audit, you should ensure these files are complete and accurate, including hire and termination dates, pay rates, loan and withdrawal support, and any other important Retirement elections. Files should also be clean, organized and consistent in order to ensure documentation is maintained to be in compliance with the plan document and that all participants are treated consistently.
Before your first audit, be sure to gather and read your plan documents and determine if your plan is following all the various provisions. If something is unclear, inquire of your TPA or other plan service provider.
Q: WHAT SHOULD YOU EXPECT AFTER THE AUDIT?
A: After the audit has been completed, your auditor will issue three documents related to the audit:
- A report expressing an opinion as to whether the financial statements fairly present the net assets of the plan.
- A letter commonly referred to as a “management letter.” This letter is an overall summary of the audit and discusses your plan’s accounting policies, any difficulties encountered in performing the audit, any disagreements with management, and any other audit findings or issues that need to be brought to management’s attention.
- A letter commonly referred to as an “internal control letter.” This letter is meant to identify and communicate areas of operations or procedures where your plan can strengthen or redesign internal controls.
If you would like more information or if you are seeking an experienced team that specializes in employee Retirement plan audits, Smith Schafer wants to help! Our firm has committed a substantial component of our staff to retirement plan audit services. Smith Schafer has provided audit, consulting, third party administrative and internal audit services for transportation company retirement plans since 1971. We can take a second look at your current plan and fees at any time.