The new tax law commonly referred to as the Tax Cuts and Jobs Act of 2017 (“The Act”) will provide many opportunities – and a few challenges – for companies in the transportation industry. This article highlights some of the important provisions, most of which are effective January 1, 2018, unless stated otherwise below.
- If your transportation company is a C corporation, it will now be subject to a 21% tax rate. Shareholders will be taxed at capital gains rates on any qualified dividends received. This provision is permanent.
- If your transportation company is a sole proprietorship, S corporation or partnership, you could receive a 20% deduction against qualified business income, subject to certain limitations. This provision is temporary and will expire on 12/31/2025.
- Individual tax rates have been reduced, with a maximum rate of 37%. This provision is temporary and will expire on 12/31/2025.
- Like-kind exchanges are now limited to real property transactions, so companies will no longer be able to defer gain on the sale of tractors and trailers. This provision is permanent.
- Business interest deductions will generally be capped at 30% of adjusted taxable income, but excess would be carried forward indefinitely. This provision is permanent.
- Entertainment expenses like sports tickets are no longer deductible. This provision is permanent.
- There was no change made to the 80% meals deduction for employees, subject to the Department of Transportation’s hours of service rules.
Two of the biggest opportunities for transportation companies and any entity that is capital intensive are the 100% bonus depreciation provisions and increased first-year expensing (Section 179) that were included in the bill.
The Act modifies existing bonus depreciation rules by increasing the first-year depreciation deduction to 100% of the basis of qualified property placed in service between September 27, 2017, and December 31, 2022. Thereafter, the amount of bonus depreciation is reduced by 20% annually, and will be phased out by 2027. Taxpayers can alternatively elect to use 50% bonus depreciation (rather than 100% bonus depreciation) during the period September 28, 2017, through December 31, 2017. Additionally, the provision requiring that the original use of the property commence with the taxpayer has been removed. Accordingly, both new and used property are now eligible for bonus depreciation.
Section 179 Expensing
The Act increases the Section 179 expensing limit to $1.0 million, up from the current $500,000. Similarly, the bill increases the Section 179 phase-out to $2.5 million, from the current $2.0 million. Both amounts are indexed for inflation beginning after 2018. This provision is permanent.
So what will that mean?
If a trucking company purchases a new or used tractor for $130,000 between now and December 31, 2022, they can expense the entire amount in the year the equipment is placed in service. Under prior law, if the tractor was used there was no bonus depreciation available and it was depreciated over three years. The first-year depreciation deduction would have been $43,329. If the tractor was new, there was the opportunity for 50% bonus depreciation, which would have generated $86,665 of first-year depreciation expense.
The new tax provisions will give companies added incentive to update their fleets and receive an immediate tax deduction. Companies will have an opportunity to impact their taxable income and the corresponding amount of tax they pay by purchasing equipment. The combination of these provisions and the lower tax rates should provide transportation companies with increased cash flow to meet increasing demands. For more information about how the new tax provisions can create both opportunities and challenges for the transportation industry, contact us.