As a transportation company owner, the decision about how and when to sell your business will be one of the hardest you will ever make. It will also be one of the most important. Maybe you have children or other family members who will continue the business. Maybe you have already been approached by an interested outside party. Whatever your succession plan, there is potential for significant income, gift and estate taxes related to the sale of your business. This could mean business assets being sold to pay these taxes, leaving little for your beneficiaries. Business succession planning must include ways to continue your business and to do so with the smallest possible tax liability.
The first step in selling your business is to determine its value. It is critical that any transportation business owner knows and understands the objective value of their business. There are several key factors that may help determine the value of a business: cash flow, earnings before taxes and fixed assets. However, to get the best and most accurate measure of your company’s value, you will need to consult a business valuation specialist. Smith Schafer works with transportation business owners to uncover the true value of their companies’ tangible and intangible assets. The resulting valuation report provides an accurate baseline measurement that informs your strategic plan.
Sale of the Business
If and when you sell your transportation business, you will receive assets that can be converted to cash. If the sale occurs before your death, it will likely be subject to capital gains tax in the year of the sale. One option for selling your business while minimizing your tax burden is to have a buy-sell agreement. A buy-sell agreement is a legal contract planning the sale of your business to a willing buyer at a predetermined price. The buyer may be a family member, a key employee, an outside party, or the business itself. The agreement should specify what events will trigger the sale – events such as your retirement, disability or death. When any of these events occur, the buyer is legally bound to buy your business from you or your estate at the predetermined value. As long as the sale is for the full fair market value of the business, it is not subject to estate or gift taxes.
Perhaps your succession plan includes transferring some or all of your transportation business interest to a family member or key employee. This may be done through a systematic gifting program. In 2017, you are able to gift up to $14,000 per individual without incurring a gift tax liability. If you and your spouse own the business, each of you may gift $14,000. Likewise, if you are transferring the business to an individual and a spouse, you may gift each of them $14,000. Transferring your business this way allows you to transfer a significant portion of your business without any gift or estate tax liabilities. However, depending on the value of your business, you may not have the time required to transfer your entire business interest in this way.
The transportation industry is known for high employee turnover so proper succession planning will help ensure your company’s success. To help you through the succession planning process, Smith Schafer offers services designed to help Minnesota businesses create and execute a successful transition strategy. Whether you need help creating a succession plan or assistance with implementing various stages of the plan, our professionals can guide you. Contact us today to schedule your FREE 30 minute consultation.
Whether your company has one vehicle or dozens 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 a financial professional. Deductions can make a major difference in the cost of operating a fleet, particularly in the first year of ownership. 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 80 Minnesota transportation entities.
Example (under current tax law):
You can deduct certain amounts for depreciation of vehicles used for business purposes, including passenger cars and light trucks or vans. Consult with your Smith Schafer professional for the details.
You can deduct the business-use percentage of such operating costs as gasoline, oil, maintenance, insurance, registration fees and licenses.
If you lease, you can deduct the business-use percentage of your monthly payments. Deductions are slightly reduced for certain passenger cars and light trucks and vans. You can also write off the business-use percentage of operating costs for a leased vehicle. Whether you buy or lease, keep good records of the business miles you drive for tax purposes.
FOLLOW UP WITH MAINTENANCE
Beyond tax savings, simple maintenance can keep your costs down and your safety record up. Here are a eight tips:
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.
Avoid premium gasoline unless necessary. If your vehicles do not specifically require an upgraded fuel, buy regular unleaded.
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.
Keep your fleet in a garage or parked under a carport. It helps 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.
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.
Watch for Hidden Costs
What’s driving your business? It should be efficiency and profit, but too often it is competition, revolving training and cash flow. 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. Let’s start the conversation.
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:
Taxicab and ride share services
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 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 companies should carefully consider sales and use tax nexus issues. Crossing state lines for a job may be a way to boost the bottom line, but doing so may also mean dealing with complex tax laws. States are adopting far-reaching rules and interpretations on the issue of nexus and it is important to understand your responsibilities.
WHAT IS NEXUS?
Nexus is known as, “the level of contact that must exist between a taxpayer and a state before the state has the authority under the U.S. Constitution to assess a tax.”
Many states are increasing the number of audits, thereby allowing states to collect more revenue without enacting new taxes or increasing tax rates. These state audits are unexpected and taxpayers are shocked to learn they are not in compliance and may face substantial tax and penalties as a result.
State income tax nexus may be attained through one of three primary actions:
A physical presence
An economic presence
Through the ownership of a pass-through entity satisfying either the physical or economic presence standards
Physical nexus is created if a company maintains a temporary or permanent presence of people (employees, agents or representatives) or property (inventory, offices or warehouses) within a state. A permanent presence is deemed to be that which is substantial and long-term. Whereas, temporary presence may be created through visiting customers or prospects, or even minor attendance at trade show events.
Economic Nexus, also known as a “factor presence test,” may establish nexus with a taxing state, even though the business entity has no physical presence, but only makes sales to customers in the state. Under this test, there is no need to have any physical connection with the state. Under the factor presence standard, states will be deemed to establish nexus if the level of activity exceeds a certain threshold. Not all states have adopted the economic nexus approach, however, the number of states participating is growing. California, Ohio and Washington are the more active states applying the economic nexus standard.
For the states requiring a physical presence, many business entities may be protected from potential state income tax assessments under a long-standing Federal law. Public Law 86-272 prevents states from taxing out-of-state corporations on income derived from business activities within the state if their activities are limited to “mere solicitation of orders” and the orders are approved and filled from outside the state.
Does this apply to my transportation company?
Generally, having employees or owning or leasing property in a state creates nexus. Other activities qualifying you for nexus include:
Maintaining a local bank account
Accepting orders for your transportation services
Using a local phone number
A nexus study was done by Sabrix, Inc. and the results showed that 95 percent of the companies surveyed underestimated their nexus issues. The most common items companies overlooked were:
Independent contractors – agents acting on behalf of the company may create nexus
Services – performing services in other states may create nexus
Trade shows – spending a single day at a trade show in another state may create nexus
There are many complexities with today’s cross-border business climate requiring careful consideration because of unforeseen nexus issues. Smith Schafer can help you navigate the laws to ensure your state income tax obligations are correctly calculated and reported. Transportation has been a key practice area of ours since 1971. Our Transportation Group, comprised of numerous professionals, is committed to serving over 80 Minnesota transportation entities.
Hiring people from targeted categories and employing them for at least 120 hours may qualify your transportation company for the Work Opportunity Tax Credit (WOTC). Finding good drivers is a constant challenge for transportation companies. This program is designed to increase employment opportunities for individuals who typically experience certain barriers to employment. The WOTC program was renewed for five years, retroactively from January 1, 2015 to December 31, 2019.
Any first-time hire may qualify your transportation company for this credit. The new hire must fall into one of the following target groups listed below:
with a service-connected disability who have been unemployed for at least six months in the past year.
with a service-connected disability and hired within one year of their discharge/release date.
who have been employed for at least six months.
receiving Supplemental Nutrition Assistance Program (SNAP) benefits.
who have been unemployed for at least four weeks, but less than six months.
Food Stamp Recipient
Designated Community Residents
Vocational Rehabilitation Referral
Supplemental Security Income Recipients
Depending on which target group the individual belongs to, the maximum credit per new hire may range from $1,200 to $9,600.
WOTC Program Details
Your HR professional will need to complete a screening of a potential employee and instruct them to complete the WOTC survey using one of the following methods:
Call Center Survey
If it is determined they qualify for the WOTC, the employee must complete IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) on or before their start date. This form MUST be postmarked within 28 days of the start date and sent to the state Department of Labor for Certification. This form is used to make a written request to the state workforce agency to certify an individual as a member of a targeted group.
The credit is equal to a percentage of the eligible employee’s wage and must work at least 120 hours to receive credit. The average credit per qualified employee is $1,200 to $1,500, with the number of qualified employees dependent on the job type, location and wages. Most transportation companies may see anywhere from 10-30 percent of their new hires qualify.
Requirements to be Eligible for WOTC
The credit is limited to the amount of the business income tax liability. When your transportation company applies the credit against your income tax liability, the normal carry-back and carry-forward rules apply. Any unused credits may be carried back one year and carried forward for 20 years.
Reporting the credit requires a wage add back adjustment in the amount of the current year credit generated and may affect calculations of other federal and possibly state tax credits, such as Federal Empowerment Zone Employment Credit (reduces allowable qualified wages limitation – maximum credit goes from $3,000 to $1,800) and the Federal Indian Employment Credit (not allowed in 1st year if WOTC claimed).
Why should your transportation company participate?
Below are benefits of participating in the WOTC Program:
Reduce your operating cost.
Increase revenue by reducing certain expenses.
Provide a financial benefit by reducing federal, state, and local tax liability.
Further allow HR and Tax Departments to become revenue generating areas.
Benefits received may be used to offset effect of cutbacks and/or allow funding for other special projects.
Participation in incentive programs may play a significant role in a company’s expansion plans.
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 and schedule a FREE 30 minute consultation. We look forward to speaking with you soon.