How Covid-19 is Effecting the Transportation Industry

How Covid-19 is Effecting the Transportation Industry

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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.

Have you Heard? Electric School Bus Programs Rising in US

Have you Heard? Electric School Bus Programs Rising in US

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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.

As technology 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 maintain.
  • 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 maintenance savings.

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.

School Bus Companies – Tax Reform Q&A

School Bus Companies – Tax Reform Q&A

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On 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.

Section 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 2027. 

NOTE – MINNESOTA TAX LAW CONFORMITY

The 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 reform.

Questions?

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.

VIDEO: 4 Tax Items Impacting Transportation Industry in 2020

VIDEO: 4 Tax Items Impacting Transportation Industry in 2020

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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. 

Questions?

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

Transportation Companies: Tax Impacts of Entity Structures

Transportation Companies: Tax Impacts of Entity Structures

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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

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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