Navigating Your Transportation Business Through COVID-19
Our transportation team has been getting many questions about how to navigate a business through this pandemic. We will discuss a handful of questions and answers here and update this post frequently as we continue to learn more about the impact this will have in the coming months.
Q: The summer months are the leanest time for my school bus company. I know my cash needs for this period, but due to the PPP loans, I have more debt and more cash than usual. I have spent the money necessary to get the PPP loan forgiven. What should I be doing with the excess cash?
A: There is no “one size fits all” solution. One client example:
Pay down particular short-term debt (not PPP loan) with a portion of the perceived excess cash.
Pay down a piece of long-term debt in advance of the amortization amount required with a part of the perceived excess cash and reserve an amount more substantial than the average summer reserve for the fall business uncertainty.
Reevaluate in a month or two.
Q: I am 68 years old and have been in the transportation industry all my life. Is it a good time to sell my business, or has the pandemic caused all the buyers to vanish?
A: As a result of the pandemic, most businesses have been impacted negatively. The number of deals over the past several months have diminished. However, there are still strategic buyers looking to acquire a business. The best approach is to work on preparing the business for sale.
Take a look at how your company operates.
• Do you have parts inventory that is poorly organized? • Do you have old parts that won’t work on your existing fleet? • Do they take up shelf or floor space? • Would a buyer see the inventory as clutter or as a valuable asset if it was better tracked? • Is the fleet in good repair, or has there been deferred maintenance? • What about your office, books, and records? Do they need organization? • Are your records up to date for last month-end closing?
If an owner is ready to sell, efforts in these areas bring significant dividends. Many times, discussing with your accountant or banker that you want to quietly put the word out that you are considering a change, can bring interested parties to the table without disruption to the employee group. This can be done privately.
Q: I am working on a deal to purchase a business, including vehicles, office equipment, shop equipment, and goodwill. There are significant personal property and vehicles, and if I buy assets, I have to pay the motor vehicle excise tax and sales tax on the deal. Wouldn’t it be better to buy the entity stock and skip paying sales tax?
A: It is true if you purchase the entity, you skip the motor vehicle excise tax. That number on a $2,000,000 fleet is approximately $130,000. However, we could assume the fleet has been depreciated to $200,000 remaining tax basis. Buying the entity vs. the assets, then the 1,800,000 in depreciation is forgone. At an income tax rate of 31 percent as an example, the tax benefit of buying the assets and not the company common stock is $1,800,000 X .31 = $558,000.
Additionally, the purchase of goodwill would be amortizable over 15 years under and asset purchase approach. If a person purchases the company stock, there can be a significant amount of unknown liabilities that do not show up for years.
Q: Will there be an impact from COVID-19 on my retirement plans?
A: Several provisions in the CARES Act directly affect retirement plans with the intention of benefiting plan participants. For example, the Act increases the maximum loan amount that can be taken from a participant’s retirement plan account. However, the adverse effect of COVID-19 on the overall economy will likely also negatively affect the plan sponsor. This could lead to a reduction in or elimination of employer matching contributions. Also, a business that has been forced to lay off a portion of its workforce could be subject to a partial plan termination.
Additional Transportation Client Resources
The Smith Schafer transportation team, comprised of numerous professionals, is committed to serving over 110 Minnesota transportation entities. We have the experience and understanding of the transportation industry to make a lasting positive difference in your future success.
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
Note: 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 provided from the IBISWorld Industry Reports, April 2020.
Q&A of the Virus Impacts on School Bus and Trucking Businesses
The transportation industry is feeling the impact of the COVID-19 crisis in a variety of ways. To assist transportation companies during this uncertain time, the Smith Schafer Transportation Experts are providing a list of the top questions we hear from the industry.
Q: How has the COVID-19 pandemic affected transportation companies?
A: The services of transportation logistics companies are in high demand due to the continued need for movement of food, consumer staples, medical supplies, and other necessities. Carriers may have to reposition their fleets to serve the hardest-hit areas, which can add costs and additional time.
Conversely, the need for school buses and motor coaches has virtually been eliminated as schools remain closed, and long-distance trips continue to be canceled. Costs have decreased in the form of lower salaries and fuel costs, but revenue has also declined significantly. According to IBISWorld April 2020 Report, revenue growth for the public-school bus industry has been adjusted to -1.4% in 2020 due to reduced demand. Industry profitability is expected to be challenged by school closures and the introduction of online classes.
Q: What have we advised our transportation clients to do to lessen the impact on their businesses?
A: We have advised our clients to think long-term. The COVID-19 pandemic is a drastically different situation from 2008 or other economic downturns. We can still weather the storm with proper planning and thoughtful decision making. We recommend the following:
Cashflow analysis and projections are vital. We recommend creating a 14-week cash flow forecast.
Be aware of alternate funding sources, such as SBA loans or other federal or state programs.
State and local funding allocated to industry services are expected to be impacted over the coming years. We recommend planning for additional shortages and reforecast financial plans.
Understand your drivers and KPIs. This will help you make the best decisions.
Q: Are other transportation clients taking advantage of the CARES Act and the Payroll Protection Program (PPP) to keep their workforce employed?
A: Several of our transportation clients have taken advantage of PPP loans to help their employees. The program requires 75% of the proceeds are used to pay salaries and related costs. However, if school routes or motor coach trips are canceled, it may be challenging to keep employees on the payroll, which could mean that at least a portion of the loan will not be forgiven.
Q: What options are available to transportation businesses who may not survive an economic downturn?
A: These uncertain times have taken a toll on transportation businesses. Some owners are considering selling their business or consolidating. While negotiating a merger or business sale, it is helpful to conduct a valuation. There is more to business value than simply your balance sheet today. Our goal is to make sure you are getting the best purchase price, even during the current crisis. We also recommend consulting with an attorney and contacting lenders and vendors.
Q: Is there an impact from COVID-19 on transportation business retirement plans?
A: Several provisions in the CARES Act directly affect retirement plans for the benefit of plan participants. For example, the Act increases the maximum loan amount that can be taken from a participant’s retirement plan account. However, the adverse effect of COVID-19 on the overall economy will likely also negatively affect the plan sponsor. This could lead to a reduction in or elimination of employer matching contributions. A business that has been forced to lay off a portion of its workforce could be subject to partial plan termination.
Q: What trends have you seen transportation companies using in response to the pandemic?
A: Outside of wages and fuel, one of the highest costs for any transportation company is its fleet. As a result of the pandemic, transportation companies have started to reassess alternative fleet strategies. This could mean the additional capacity for a trucking company that is in high demand or a change in purchasing plans for a school bus or motor coach company where services are dwindling.
The long-term impacts of the COVID-19 pandemic are unknown but will likely include additional safety measures such as health screening, personal protective equipment, and limiting time spent outside the vehicle. We recognize your transportation business may be facing decisions you have never had to face, and we are here to help.
Questions about how COVID-19 is effecting your Transportation Company?
Contact us today to work with a qualified advisor to help you leverage opportunities and make the best decisions for your transportation company. 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.
The school bus industry has recently experienced a moderate level of technological change and development. Transportation companies continue to invest in technology, which improves transportation safety, providing more environmentally friendly service and improving quality of service.
According to IBISWorld 2019 report, industry
operators are expected to increasingly invest in low-emission school buses.
Rising concerns about the harmful effects of older diesel school buses on
children’s health has led to increased pressure on school districts and
industry operators to invest in newer school buses with lower emissions. Hybrid
school buses were first used in 2008. This technology was introduced to the
Twin Cities area in the fall of 2017.
continues to develop, electric school buses are expected to become more common
over the next five years, due to environmental concerns and projected increases
in fuel prices.
Pros of Electric School Buses
Electric buses produce zero emissions, which means cleaner air
for school kids and the planet.
Fuel and maintenance costs for electric buses
are much lower than for diesel
buses. There is no need for engine oil changes and no transmission or engine to
There are grant incentives for electric school buses, which may help to make
it more affordable.
Cons of Electric School Buses
An electric school bus can cost from $200,000 to $400,000, while
conventional diesel school buses run $100,000 to $150,000.
It takes a long time to recoup its price premium due to low usage patterns.
School buses average of 66 miles per day, about half as much as a transit bus,
according to the National Rural Electric
Cooperative Association. The large amount of time a school bus sits parked
increases the time it takes to earn back the cost difference through fuel and
Is your school bus company considering electric buses?
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. Click here to schedule a free 30-minute consultation.
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.
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
NOTE – MINNESOTA TAX LAW CONFORMITY
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
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.
Our tax professional in the industry, Kim Mahanna discusses the main items affecting the transportation industry in the new year. Click below to watch the short video.
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.