By David Trost, Director of Transportation Finance at LeaseQ
Over the past year, there have been two major pieces of legislation to impact the trucking industry. The first was the decision not to postpone the congressionally mandated implementation of Electronic Logging Devices (ELDs), which went into effect on December 18, 2017, and the second the recently implemented Tax Cuts and Jobs Act.
The trucking industry has been anticipating tax benefits since President Trump delivered his October speech in Harrisburg, Pennsylvania to nearly 1,000 truckers. With the new reform, Trump wanted “lower taxes, bigger paychecks, and more jobs for American truckers, and for American workers”.
The passing of the Tax Cuts and Jobs Act in December meant that the trucking industry would see the largest benefits when they file their 2017 and 2018 tax returns. The bill affects nearly all carrier types and fleet sizes, from owner operators with a few power units all the way up to Fortune 500 transporters.
Increased Incentives Regarding Equipment Purchases
The first-year depreciation deduction has increased to 100 percent for equipment acquired before September 28, 2017 and put into use after September 27, 2017. Assets eligible for bonus deprecation will decrease 20 percent per year starting in 2023 and sunsets at the end of 2026. Under the previous law, only new property was eligible for bonus deprecation. This has now expanded to include both new and used equipment.
This spurred a shift from an expense-based system where a $100,000 truck might have been depreciated $20,000 over a five-year period versus being depreciated in full the first year. Profits are claimed at a later date once the truck has the opportunity to generate significantly more revenue. Now, trucking companies are able to invest in assets now to take additional profits down the road.
In addition to bonus deprecation, the deduction limit for Section 179 has increased to allow the expensing of up to $1 million in equipment and the limit on equipment purchases has increased to $2.5 million. For companies operating heavy SUV’s, the “Hummer tax loophole” remains the same as pre-tax reform limit at $25,000.
The increased Section 179 limitations and bonus deprecation stand as significant incentives for transportation companies in the near term to acquire new equipment. However, several states do not currently conform to either bonus deprecation or Section 179. It’s greatly important for businesses to keep a close eye on how bonus depreciation and equipment expenses are treated in their state and watch for state legislation that provides conformity to the new rules.
Reduction of Corporate Tax Rates
Pre-tax law corporate tax rates were taxed based on taxable income with brackets at 15 percent ($0 – $50,000), 25 percent ($50,001 – $75,000), 34 percent ($75,001-$10 million), and 35 percent (greater than 10 million). Under the new U.S. tax law, corporate tax rates are a flat 21 percent.
Due to the significantly lower tax rates that larger fleets will receive, there is expected to be an opportunity for increased profitability and re-investment. Examples to date include year issuances of Trump bonuses by several companies and XPO reporting a net benefit of $169.9 million in Q4 due to the reform.
Increased Deduction for Pass Through Businesses
According to the Brookings Institution, roughly 95 percent of all businesses in the United States are pass-through entities. Partnerships, S corporations and sole proprietorships will receive a 20 percent deduction for qualified pass-through businesses income. Limitations will apply on service-based businesses if their annual qualified income is greater than $157,000 if single or $315,000 if married.
By capping service-based businesses, the increased pass-through deduction is sending a clear message: Lawmakers are looking to spur growth in businesses that are focused on capital-based income versus limiting the deduction on labor-based income. Capital-based income comes from putting assets into place that generate value over time i.e. the trucks in a trucking company. As it currently stands, this is in line with the first two benefits addressed and follows the theme of creating growth and reinvestment opportunities for asset-based companies.
As of today, six states will only incorporate the new pass-through deduction unless the income starting point for the deduction is changed from federal taxable income to federal adjusted gross income.
There are a lot of major benefits for the trucking industry that will be generated by the new U.S. tax law, especially over the next two years. However, it’s crucial for business owners to watch what changes will be made at both the state and federal level as the bill is tweaked and IRS guidance takes hold. Trucking organizations must educate themselves on the new tax law and its current and continued impact on their operations and opportunities to acquire new assets.
Disclosure: I am not a licensed tax professional. Before making any business decisions regarding the Tax Cuts and Jobs Act you should consult a CPA.
About David Trost
David Trost is the Director of Transportation Finance at equipment finance marketplace, LeaseQ. He specializes in transportation and focuses on creating successful partnerships to drive commercial finance originations through our online marketplace.