Suddenly, the major tax issue for trucking to watch is income tax relief, not excise tax restructuring. So how would carriers fare under the Bush and House Democratic tax plans?
There are three provisions in the President's proposal that particularly bear watching: dividend relief, individual rate cuts, and a small investment incentive.
The biggest, accounting for more than half of its $674- billion, 10-yr. price tag, is a complete exemption from individual income tax for dividends received from corporations. The proposal would improve the attractiveness of dividend-paying companies relative to those that retain all earnings and reward their investors through higher stock prices. Thus, even firms that don't pay dividends now would need to consider doing so.
The exemption could induce some firms to change their legal form of organization. In the past decade, many carriers have elected to organize as "S" corporations, partnerships or limited-liability companies, which are taxed at the individual shareholder or partner level, instead of traditional "C" corporations, in which both the corporation and its shareholders are taxed.
Under the Bush plan, companies that retain individual-level tax status could be winners, too. That's because the plan would make retroactive to Jan. 1, 2003 the upper-bracket individual rate cuts scheduled to take place in '04 and '06. The top individual rate, currently 38.6%, would drop to 35%, the same as the top corporate rate.
Businesses of any legal form that make small amounts of investments would get help from a third provision in the Bush plan: an increase in the amount of new equipment that could be expensed, or deducted immediately, instead of depreciated over several years. The limit would rise from $35,000 to $75,000, but only for businesses whose investment in equipment during the year totals less than $400,000.
House Democrats have suggested one tax change that might be adopted, despite the party's minority status. That would be a further boost to the "bonus" depreciation that was enacted as part of last year's stimulus bill. The Democrats would allow firms of all sizes to write off 50% of the cost of equipment placed in service in '03, vs. 30% under the current temporary law. The remaining cost would continue to be depreciated under regular rules (three years for tractors, five years for trucks and trailers).
The House Democratic proposal also includes a one-time hike in money flowing to states for highway construction. But the Democrats would not accelerate the individual rate cuts.
Neither side has proposed to extend a provision that could provide the greatest help to struggling carriers. Last year's bill let firms with net operating losses (NOLs) carry-back the loss to five prior tax years instead of two, and claim a refund of taxes previously paid in those years. The extended NOL carry-back applied only to tax years ending in '01 or '02, however. Given the weak economy and high fuel prices, many carriers are likely to report NOLs in '03. But if they also had losses in '01 and '02, they will not be eligible for refunds under current law unless they can make it into '04 and carry forward the NOL.
The bottom line: Keep your spreadsheet program booted up. The President, backed by a solid majority in the House, will press to get the law changed promptly and retroactively. That means there can be a reward for making changes in investment strategy, and even legal form of organization, as soon as the final provisions become effective. But many of the changes, especially the dividend exclusion, are likely to be modified or replaced with other provisions.