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 110 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.
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.
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.
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 110 Minnesota transportation entities.