In a recent Fleet Owner and Ryder webinar, Make Your Fleet Less Taxing: How to Get the Most out of the New Tax Law, two industry experts explained taxation as it pertains to trucking.
Ryder’s director of sales operations Kevin Sheedy and Troy Hogan, CPA and director at Katz, Sapper & Miller's Business Advisory Group compared what the tax law was, is, and upcoming changes, noting strategic moves fleet owners can make to increase profitability while avoiding unnecessary fees.
Hogan noted that since the 2% itemized deduction is gone, including per diem, owners and managers should address how to mitigate the effect on their employees.
“In this driver-centric time, a lot of companies obviously do not want their drivers to face a tax increase,” Hogan said, noting a viable solution is to implement a broad per diem plan.
Sheedy discussed a positive trend: The transportation industry’s 2018 market conditions have been notably strong, for multiple reasons. Steady economic growth, higher freight volumes and rates and a strong commercial truck orders market, according to ACT research, which released May’s report for class A trucks; more than double from levels last year and the third highest May on record. Far from a one-month abnormality, the past six months have averaged more than 40,000 units per month—an unprecedented level for the industry, Sheedy said.
This domino effect from the new tax rate is the motivation behind increased vehicle orders, Sheedy explained.
“The tax reform and other factors are combining to support this practical benefit that many companies are seeing today of improved cash flows,” Sheedy said.
“So, I translate that into ‘yes, I can get a new truck,’” Sheedy said of consumers, who have newly-increased confidence. “So not only can I get a truck, but if you’ve got a greater degree of confidence maybe the answer is, ‘yes, I will get a truck, today.’”
And by allowing a company to write off the entire vehicle’s expense in the first year, it encourages expansion in the form of purchasing more equipment, which calls for more drivers.
While the financial means are necessary to incentivize companies, Sheedy said confidence is that other key puzzle piece. Together, this helps a company as well as its customers in what Sheedy referred to as a “positive backdrop for the industry.”
Cost and risk level are important factors, but Sheedy said they should not be the only ones in the decision. One new trend he has seen recently is leasing with tax benefits of owning, but for every unique need, there is a new option being offered to cater to it.
Buying the truck, he said, is just the first of many steps; it merely begins the process. Factors within a company’s control include acquisition, maintenance, disposal, financing options, compliance, fuel, insurance and technology adoption. External factors that are more reactionary are the effect of that technology, DOT, tax considerations, maintenance quality, residual risk, environmental regulations, flexibility and financing restrictions, and they all influence the environment companies function within.
Earning more money is a double-edged sword, Sheedy explained, because taxes increase. Additional deductions might be a solution, like buying a truck, but it would need to be in service by year’s end. If the tax advisor meeting is around that time, a purchase of this nature would be a race against the clock.
The costs may not be offset by the benefit, so the context of the company and other potential solutions will affect the ultimate decision. If it’s feasible, buying this truck could be a smart move, as bonus depreciation implemented in 2001 has doubled. Under prior law 50% of an asset’s cost in the acquisition year could be deducted so long as it was new property. Now, as much as 100% of the cost of the asset from 2018-2022 can be deducted, with each following year lessening until it sunsets at the end of 2026. And now, this applies to both new and used property, widening the assets available for this increased deduction.
A factor that may dissuade the purchase is the elimination of like-kind 1031 exchanges for trailers, trucks and all personal property. They are still in place for real estate; however, after 2022 there may be losses in realizing gains on equipment sales.
The new 21% C Corporation tax rate and preferential tax rate on repatriation will help many, but it gets complicated for S Corporations or partnerships with the new section 199A deduction.
Where it was generally deductible under the old law, business interest expenses in surplus of 30% of the corporation’s adjusted taxable income are now disallowed. After 2022, the adjusted taxable income is only earnings before interest tax; depreciation or amortizations will not be considered, so this area calls for considerable attention.
“It is important to understand these new tax laws. You may not need to do it personally, but certainly be aware of them,” Sheedy advised. “It is certainly better to have a proactive discussion sooner rather than later.”
Sheedy cautioned putting the April 29 filing deadline at the bottom of the to-do list. And because of the uniqueness of the new tax code, Hogan said it will affect every company differently.
“You want to keep the big picture in mind with all considerations; operational considerations, cost, risk and taxes, both for the near term and long term,” Sheedy said. “And that approach will hopefully lead you to your best decision for your business.”
