Every business faces a myriad of challenges on its way to profitability. There are infrastructure concerns, hardware and software issues, employee management, and, of course, the task of delivering products and services. But regardless of the challenges faced, they are all influenced by regulations.
For carriers, like so many businesses, regulations affecting taxes and equipment depreciation are among the top concerns, although as they get ready to deliver the final shipments of 2013 and open business in 2014, there is one bloated elephant in the room: Obamacare.
The Patient Protection and Affordable Care Act, aka Obamacare, is not only affecting individual consumers in the U.S., it is also having a significant impact on businesses. While the government has postponed the compliance date of the “employer mandate,” which requires employers of 50 or more full-time equivalent employees to offer health coverage to all full-time employees or face a penalty for each uncovered employee, businesses must prepare nonetheless. It is expected the mandate will kick in on Jan. 1, 2015.
There is also an additional 3.8% “healthcare tax” on incomes over $250,000 that businesses must collect, says Mark Flinchum, partner in the law firm Katz, Sapper & Miller. The firm specializes in taxes and counts more than 90 trucking operations among its clients.
Starting in 2018, employers will face a 40% tax on “Cadillac” health plans. These are plans that cost more than $10,200 for individuals or $27,500 for families. While the rule doesn’t go into effect for several years, some employers have already started shifting cost burdens on such plans to employees. Others are investing in more wellness programs in an effort to create healthier employees and lower overall insurance costs.
A healthier bottom line
According to a recent Transport Capital Partners (TCP) Business Expectations Survey, the number of carriers that reported the law has had no effect on their business dropped from 36% to 8% in the third quarter. The survey found that in November 2011, 43% of carriers indicated they were likely to have employees contribute more toward health costs. Today, carriers are more likely to implement wellness programs (44%) and health savings plans (30%).
The survey also found that the number of carriers that anticipate opting out of providing healthcare insurance altogether through the use of independent contractors has grown from 13% two years ago to 24% this quarter.
As anticipated across all business segments, smaller businesses are more actively dropping coverage.
Smaller carriers, defined by TCP as those grossing less than $25 million annually, also have different options under the healthcare law. TCP said that about half of the smaller carriers surveyed have fewer than 50 employees, which is the threshold for requiring employers to provide health coverage under the delayed employee mandate.
In the survey, 30% of smaller carriers reported they are considering dropping all coverage. Only 10% of larger carriers are doing the same. Smaller carriers are also more likely to reduce coverage (12% vs. 4%) and/or to have their employees contribute more (24% vs. 15%).
Healthcare changes, though, are just one tax-related change that carriers must be aware of, says Flinchum. Taxes come in many forms: highway use taxes, fuel taxes, and payroll taxes, to name a few. When President Barack Obama and Congress cut a budget deal early this year, it provided an increase in payroll taxes. But that is just the beginning. According to the Congressional Budget Office (CBO), tax rates are pegged at 17% of gross domestic product (GDP) this year, although government spending will account for 20.8% of GDP, creating a nearly 4% deficit of about $650 billion. CBO says that gap will shrink by 2023 but only slightly before growing dramatically over the next 15 years to a gap of nearly 7%.
That money must be made up somehow, so expect more tax changes in the future. There has been talk for several years by both political parties of a tax code overhaul, but Jake Jacoby, vice president of government relations for the Truck Rental and Leasing Assn. (TRALA), is skeptical.
Increases keep coming
“I’m somewhat pessimistic about [tax changes],” Jacoby says. “You’ve heard a lot about comprehensive tax reform. I think there is very little chance of comprehensive tax reform getting done next year. I think there is a lot of concern [among TRALA members] on the tax and regulatory front.”
A new Medicare tax of 3.8% is attached to investment income, capital gains, real estate, and royalties, Flinchum points out. This would also hit firms that operate a holding company for tax reasons.
“A lot of our trucking companies own terminals [through a holding corporation] that they rent to the trucking operation,” Flinchum says. “That [revenue] is going to be subject to that additional tax.”
An additional 0.9% tax will apply on earned income over $250,000, although Flinchum points out that by law, companies must withhold that tax on employee wages over $200,000.
There is, however, some good news on the tax front for 2013. Currently, Internal Revenue Code Section 179 for tax year 2013 allows a company to deduct up to $500,000 in qualifying capital expenditures as an expense rather than depreciate the cost of the asset over time.
In addition, a 50% “bonus depreciation” tax credit is in place through the end of this year. According to Flinchum, trucking firms can depreciate 50% of a new asset purchased in the current tax year and amortize that asset as normal.
Finally, on the tax front, Flinchum notes one other tax rate of which smaller trucking operations must be aware. The tax rate on the highest-earning individuals for 2013 is 39.6%. This might hit individual owners of privately held and smaller trucking companies if their corporation setup is such that the profits from the company “flow through” into personal accounts.
Fleets are also facing several other regulations, including a new broker bond. As of Oct. 1 of this year, the bond has increased to $75,000 for brokers and freight forwarders, but for the first time, it also affects any carrier that forwards or subcontracts freight.
A push is on in Washington to increase insurance minimums from the current $750,000 to $4,442,000. The bill is now in a House subcommittee. Trucking’s biggest lobbies, the American Trucking Assn. and the Owner-Operator Independent Drivers Assn. (OOIDA), are adamantly opposed to the bill (H.R. 2730).
“The legislation will not make highways safer and is completely unnecessary, as roughly fewer than 1% of truck-related accidents settle for more than $750,000 and most owner-operators have $1 million in coverage,” OOIDA spokesperson Norita Taylor says. “All this [bill] will succeed in doing is [to] increase costs for small-business competitors in trucking and chum the water for personal-injury lawyers.”
On other fronts, the immigration reform bill passed by the Senate earlier this year that would, among other things, create a path to citizenship for undocumented aliens still remains stalled in the Republican-led U.S. House.
That may be changing, though, as reports indicate Republicans are working behind the scenes, not on the Senate bill but rather on a more deliberate approach to immigration reform, and that the White House may be preparing a major push of its own on one of President Obama’s second-term promises.
Influx of candidates
Either way, if a bill finally makes it through Congress, it will have an impact on trucking, which not only will see an influx of potential drivers but also dockworkers and others.
The U.S. Chamber of Commerce reports aging workers far outnumber new workers. According to Gordon Klemp, president and founder of the National Transportation Institute, those are numbers that trucking knows all too well, as 51% of drivers are age 45 or older. Only 17% of the driver community is younger than 34, he adds. Immigration reform, then, could open up a larger—and younger—pool of candidates to replace those retiring, and that might be welcome news for trucking.
However you slice it, regulations are having a significant impact on the bottom line for trucking businesses. From tax rates to healthcare, carriers must be looking beyond the Dept. of Transportation and Federal Motor Carrier Safety Administration for additional regulations that affect their bottom line.
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