When President Trump signed the Tax Cuts and Jobs Act of 2017 it came under immediate criticism by many as a boon to those in the higher tax brackets and a gift to corporations at the expense of mid- to lower-level wage earners. The administration rejected these characterizations as wrong.
However, as of February 8, total refunds for all filers, the majority of which were personal returns, were $22.18 billion compared to $28.86 billion for the same period last year, a 23.2% drop according to the Internal Revenue Service. The average refund was $1,949, down 8.7% from $2,135 in 2018.
We asked Colton Lawrence, owner and president of Equinox Business Solutions, to make sense of the new tax law and explain how it impacts three groups of industry stakeholders: Drivers employed by carriers (so-called W-2 drivers), owner-operators, and the truck carriers themselves.
While everyone's tax situation is different, Lawrence offers these overall observations from his company's 15 years of tax preparation and consultation to the trucking industry.
"The biggest change is that the per diem has gone away," he says. Drivers used to deduct the cost of work-related expenses ranging from mobile phones to work gloves to soap used for showering on the road. "It used to be that they could deduct that on form 2106. They are no longer able to do that, and it’s impacting all company drivers in differing degrees."
The average driver on the road about 300 days a year could often find up to $15,000 a year in such deductions. This has been replaced by a $12,000 personal exemption. He adds: "If you average all of that out for company drivers, we’re seeing tax liability go up by somewhere between $600 and $1,000."
For team drivers the impact can be higher.
"If you have a team, like a husband-wife team, filing jointly, that is causing a real big impact on them, especially for families that have more than two children. Because of the exemptions that are going away, they’re no longer able to claim those exemptions, and that’s causing a big increase in their taxable income as well.
“You've got this group of company drivers that, between being impacted on the per diem and then perhaps not being able to take the same level of deductions for the number of children that they have, and they’re getting hammered. We’ve seen taxable income go up by as much as $20,000, $25,000 for large families between that and the per diem."
As in the case of the single driver, that number is not the tax itself but the taxable income. The amount of tax paid will depend upon their bracket.
There may be a per diem workaround for some drivers, Colton suggests. "If carriers are paying by the mile, they can split that out. They’ll still pay the same dollar per mile but they’ll only classify 85 cents per mile as pay, and then they’ll take 15 cents per mile and classify that as per diem pay, which falls on the non-taxable side. A driver's overall pay remains the same but their taxable income goes down, and so in essence, they’re able to take advantage of the per diem deduction just simply by the way the motor carrier is paying them."
Colton suggests that drivers talk to their companies about this strategy. He says that some of his larger carrier customers have been inquiring about how to implement such a plan for their W-2 drivers.
In general, O-Os get a break with the new tax law.
"Beginning Oct. 1, 2018, their per diem increased from $63 a day to $66 a day in the US." It's about five dollars higher for trips to Mexico and Canada. "That change alone, over the course of a full year, will reduce their tax liability by about $200 to $300," Lawrence adds.
He continues: "The other big change is a concept known as QBI or qualified business income. As pass-through entities, (a pass-through entity is anything other than a Class C corporation such as sole proprietor, LLC, S corp. or partnership) which most of our clientele and most of these O-O drivers are … there's a lot of complex computations that go into this, but for most truck drivers ー where this is the only business they have ー it’s a really pretty simple calculation, and they get an additional 20% deduction on top of their already-calculated business deductions."
Lawrence explains: "They take fuel, per diem, maintenance and repairs, and all the other things that go into calculating their net income on the business, and then they get an additional 20%. It’s a big help to them."
However, Lawrence says that 2018 was a banner year for most of his clients; they made a lot more money than in past years and some didn't prepare for the windfall.
"Although their tax liability is down, they made more money. Some are finding themselves in situations where they owe more than they were expecting because they didn’t pay enough on their quarterly tax estimates."
Lawrence found that some O-O's were not diligent in paying their quarterlies and may end up with a high tax bill or even penalties. "My number-one suggestion is to make sure they are setting aside enough money to cover their tax liability, because I, unfortunately, see this (high tax liability) as a way for an O-O 's business to fail [because they have already spent the money and don't have anything left over for tax payments.]
All Class C corporations get a huge tax break as the new law changes the top corporate tax rate from 35% to one flat rate of 21%. This rate will be effective for corporations whose tax year begins after Jan. 1, 2018, and it is a permanent change.
The other big news for carriers is a change in the depreciation of equipment. "There are some accelerated depreciation rules that come into play. In the past they had to amortize equipment over a period of time; they’re now able to take more of that depreciation up front."
He suggests to clients that they synchronize their purchasing cycle with the accelerated depreciation cycle. "You don't want to end up in a situation where one year you’re taking a lot of depreciation for tax purposes, which is great in that one year, but then in the following years, you don’t have any deduction because you’ve already used the depreciation Then you’re not able to deduct the principle that you’re paying on your notes, and so your tax bill goes away up."
For carriers (generally those with five or fewer trucks) that are operating as S corporations, Lawrence suggests to them that they should assess whether or not to change as a C corporation or stay as they are. "As it stands right now, all indications are that the motor carriers that are filing as S corps are still better off maintaining that S corp. status, maintaining the pass-through entity status, rather than converting to a C corp., but that could change with changes in the tax law in future years. That may be something that they want to consider."