How tax reform will affect the transportation industry
Published January 25, 2018
On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act” (TCJA) and with it, the most sweeping changes to tax legislation since the Tax Reform Act of 1986. These laws will have an impact on individuals and businesses, and will ultimately greatly impact the trucking and transportation industry. Below are some of the major laws that will affect the industry.
The TCJA improves bonus depreciation significantly. Beginning September 28, 2017, the first-year bonus depreciation is increased to 100% (see below for more details). In addition, USED Tractor and Trailers will now qualify for bonus depreciation.
Another significant change you should be aware of is Section 1031 has been changed to refer to real estate assets. Beginning on January 1, 2018, tax-free dealer trade-ins of tractor and trailers for new tractor and trailers are no longer available. Section 1031 exchanges of personal tangible property is ineligible for tax-free exchange treatment.
Employee unreimbursed expenses
Historically, Employee Unreimbursed Expenses were treated as itemized deductions, but beginning on January 1, 2018, they are no longer deductible. These expenses were known as the 2% itemized deductions, but due to the recent TCJA, they have been repealed. A solution to this is for employers to reimburse employee truck driver per diem expenses.
Individual income taxes (owners, owner-operators, employees, etc.)
(Individual income tax changes are for a temporary period: for tax years 2018 through 2025)
While seven tax brackets remain, the overall individual income tax rates have decreased, with the top tax rate coming down from 39.6% under prior tax law to 37% under TCJA. The income ranges for the tax brackets have widened as compared to prior years.
2018 Income Tax Brackets
|Rate||Single Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||over $500,000||over $600,000|
More taxpayers will take the standard deduction, with it nearly doubling under TCJA. The standard deduction for single taxpayers increases to $12,000 ($6,350 in 2017); married filing joint increased to $24,000 (12,700 in 2017) and head of household increased to $18,000 ($9,350 in 2017).
There will be no more personal exemptions effective January 1, 2018, but there will be an increase in the Child Tax Credits. In 2018 the credit will double from $1,000 (in 2017) to $2,000 for children who have not reached age of 17 by the end of the year. The phase-out also begins now at a much higher level of income than in 2017. In 2018 the phase-out begins at $400,000, while it was $110,000 in 2017. The refundable amount will also increase from $1,000 in 2017 to $1,400 in 2018. A new, non-refundable $500 credit is now available for dependents that are not qualifying children; for example, the 18-year-old child in college.
Changes to Schedule A – Itemized deductions
Some of the changes to itemized deductions include:
- State and local income taxes (or state general sales taxes), real estate taxes, property taxes, and foreign taxes paid or accrued are limited to $10,000 under TCJA. There will be no deduction available for foreign real property taxes for tax years 2018 through 2025, but the foreign income taxes can still be claimed, subject to the $10,000 limit.
- The adjusted gross income limitation of 50% has now increased to 60% for cash charitable contributions. Note that college athletic seating rights are no longer allowed.
- Personal casualty losses are no longer available, except for areas declared by the president to be disaster zones.
- Job expense and miscellaneous deductions are no longer available on Schedule A, but many above the line deductions will remain.
- Moving expenses are repealed.
The overall phase-out of itemized deductions is not applicable for tax years 2018 through 2025.
Alternative minimum tax
The Alternative Minimum Tax exemption has increased, making fewer taxpayers subject to the tax. Beginning in the 2018 tax year, the exemptions are as follows:
- Married filing joint or surviving spouse – $109,400
- Single or head of household – $70,300
- Married filing separately – $54,700
The phase-out thresholds have also increased to $1 million if you are married filing joint/surviving spouse and the threshold is $500,000 for everyone else. This will be adjusted after 2018 for inflation.
Business income taxes
(Business income tax changes are permanent.)
New 21% corporate tax rate
Under pre-TCJA law, C corporations paid graduated federal income tax rates of 15% on taxable income of $0 to $50,000; 25% on taxable income of $50,001 to $75,000; 34% on taxable income of $75,001 to $10 million; and 35% on taxable income over $10 million. Personal service corporations (PSCs) paid a flat 35% rate.
For tax years beginning in 2018, the TCJA establishes a flat 21% corporate rate.
New deduction for pass-through businesses
Under prior law, net taxable income from pass-through business entities (such as sole proprietorships, partnerships, S corporations and LLCs that are treated as sole proprietorships or as partnerships for tax purposes) was simply passed through to owners. It was then taxed at the owners’ standard rates. In other words, no special treatment applied to pass-through income recognized by business owners.
For tax years beginning in 2018, the TCJA establishes a new deduction based on a noncorporate owner’s qualified business income (QBI). This new tax break is available to individuals, estates and trusts that own interests in pass-through business entities. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels.
QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.
The QBI deduction isn’t allowed in calculating the noncorporate owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.
W-2 wage limitation
For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the noncorporate owner’s share of:
- 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
- The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.
Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year-end and used by the business at any point during the tax year for the production of qualified business income.
Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 ($315,000 for joint filers). Above those income levels, the W-2 wage limitation is phased in over a $50,000 range ($100,000 range for joint filers).
New limits on business interest deductions
Subject to some restrictions and exceptions, prior law stated that interest paid or accrued by a business generally is fully deductible. Under the TCJA, affected corporate and noncorporate businesses generally can’t deduct interest expenses in excess of 30% of “adjusted taxable income,” starting with tax years in 2018. For S corporations, partnerships and LLCs that are treated as partnerships for tax purposes, this limit is applied at the entity level rather than at the owner level.
For tax years beginning in 2018 through 2021, adjusted taxable income is calculated by adding back allowable deductions for depreciation, amortization and depletion. After that, these amounts aren’t added back in calculating adjusted taxable income.
Business interest expense that’s disallowed under this limitation is treated as business interest arising in the following taxable year. Amounts that cannot be deducted in the current year can generally be carried forward indefinitely.
Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years are exempt from the interest deduction limitation. Some other taxpayers are also exempt. For example, real property businesses that elect to use a slower depreciation method for their real property with a normal depreciation period of 10 years or more are exempt. Another exemption applies to interest expense from dealer floor plan financing (for example, financing by dealers to acquire motor vehicles, boats or farm machinery that will be sold or leased to customers).
Reduced or eliminated employer deductions for business-related meals and entertainment
Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.
Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be nondeductible.
Changes to some employee fringe benefits
The new law disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.
It also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits (for example, parking allowances, mass transit passes and van pooling), but those benefits are still tax-free to recipient employees.
Here are some of the other business-related changes in the TCJA:
- For business net operating losses (NOLs) that arise in tax years ending after December 31, 2017, the maximum amount of taxable income that can be offset with NOL deductions is generally reduced from 100% to 80%. In addition, NOLs incurred in those years can no longer be carried back to an earlier tax year (except for certain farming losses). Affected NOLs can be carried forward indefinitely.
- More generous business asset expensing and depreciation tax breaks are available. The maximum Section 179 deduction increases to $1 million, and the phase-out threshold amount is increased to $2.5 million (from $510,000 and $2.03 million respectively). There are also much better first-year bonus depreciation rules (more detail below).
- A new limitation applies to deductions for “excess business losses” incurred by noncorporate taxpayers. Losses that are disallowed under this rule are carried forward to later tax years and can then be deducted under the rules that apply to NOLs. This new limit kicks in after applying the passive activity loss rules. However, it applies to an individual taxpayer only if the excess business loss exceeds the applicable threshold.
- The eligibility rules to use the more-flexible cash method of accounting are liberalized to make them available to many more medium-size businesses. Also, eligible businesses are excused from the chore of doing inventory accounting for tax purposes.
- The Section 1031 rules that allow tax-deferred exchanges of appreciated like-kind property is allowed only for real estate for exchanges completed after December 31, 2017. Beginning in 2018, there are no more like-kind exchanges for personal property assets. However, the prior-law rules still apply if one leg of an exchange has been completed as of December 31, 2017, but one leg remains open on that date.
- Compensation deductions for amounts paid to principal executive officers generally cannot exceed $1 million per year, subject to a transition rule for amounts paid under binding contracts that were in effect as of November 2, 2017.
- The alternative minimum tax (AMT) for corporations has been removed after December 31, 2017. Any unused minimum tax credit may be used to offset regular tax liability for any tax year. A portion of unused minimum tax credit is refundable in 2018 through 2021 – refundable portion is 50 percent (100 percent in 2021) of any excess minimum tax for the year over any credit allowable against regular tax for that year.
- The Income Tax Credits available for biodiesel and renewable diesel fuels are extended through December 31, 2018. The Excise Tax Credits relating to alternative fuels is also extended through December 31, 2018.
Additional information on the depreciation changes (not permanent)
Depreciable fixed assets with class lives of 20 years or less are eligible for 100% bonus depreciation effective September 28, 2017 through December 31, 2022. After this period, the percentage phases out as follows:
- 80% for assets placed in service during 2023
- 60% for assets placed in service during 2024
- 40% for assets placed in service during 2025
- 20% for assets placed in service in 2026
- 0% for assets placed in service after 2026
Taxpayers can choose to take 100% bonus depreciation, elect 50% bonus, or elect no bonus depreciation at all.
The property is eligible now for bonus depreciation if it is “new” or “used” as long as it’s the taxpayer’s first use of the property. Under prior law, it had to be “new” and first use started with the taxpayer.
Example: Trucking company A bought a $50,000 trailer January 5, 2018 and has several options for depreciation:
- 100% bonus depreciation, a $50,000 deduction
- Section 179, a $50,000 deduction (assuming total eligible assets placed in service in 2018 were $2.5 million or less)
- 50% bonus depreciation, $25,000 write-off plus $5,000 of depreciation in 2018 on the remaining $25,000 of tax basis
- No bonus depreciation – $10,000 depreciation taken in 2018 on the $50,000 tax basis
Caution: Not all states will adopt the 100% bonus depreciation and adjustments will be needed upon filing those particular state income tax returns.
The TCJA is the largest overhaul of the tax code in more than 30 years, and we’ve covered only the highlights. For more information, please visit our website or contact Deanna Seabolt, CPA (812.670.3454) and Stephen Lukinovich, CPA (812.670.3455).