The New Tax Law Overview

Late last year, President Trump signed the Tax Cuts and Jobs Act (the Act) into law, resulting in the most sweeping tax overhaul in decades.

Many of the changes in the Act—primarily those intended to favor businesses in an attempt to spur economic growth—are permanent. Other changes—primarily those benefitting individual taxpayers—are temporary (at least for now). Some of the temporary changes include provisions: (1) reducing the top individual tax rate from 39.6% to 37%; (2) nearly doubling standard deductions ($12,000 for individual taxpayers; $24,000 for married taxpayers filing jointly); (3) eliminating miscellaneous itemized deductions for employee taxpayers; and (4) doubling the child tax credit.

The impact of the Act on each individual and business will vary. While the Firm continues to analyze the potential implications for clients, below is a brief overview of those changes that may have the most significant impact upon the transportation industry:

• Reduction in the corporate tax rate. The corporate tax rate has been slashed from 35% to 21%.
• New deduction for pass-through entities. Pass-through entities continue to be taxed at the owner’s individual income tax rate. The Act provides for a new 20% deduction for domestic “qualified business income” with some limitations.
• Depreciation changes. For equipment acquired and placed in service after Sept. 27, 2017, taxpayers can now write off 100% of the cost under revised bonus depreciation rules.
• Like-kind exchanges. The Act limits like-kind exchange treatment (previously used by transportation companies to defer gains on equipment sales) to real property transactions.
• No employee deduction for unreimbursed employee business expenses. Employee drivers can no longer deduct business expenses they incur while traveling away from home in the business of the employer. While this change does not directly impact the ability of motor carriers to offer per diem plans, it is not entirely clear what effect this change may have on how per-diem plans are administered nor how the IRS may view the continuation of such plans.

This issue of The Transportation Brief provides additional insight on some of the above changes. The Firm will continue to analyze the Act in an effort to identify its intended and unintended consequences for the transportation industry.

Spotlight on Taxation Practice Area

This issue of The Transportation Brief focuses on recent tax issues affecting companies in the transportation industry. When federal laws took effect at the beginning of 2018, Scopelitis attorneys acted quickly to assist with federal compliance issues, and with the subsequent issues that continue to arise as states readjust to align with the new tax environment. Each member of Scopelitis’ Taxation Practice offers a unique set of experiences and thought leadership.

Andy Light leads Scopelitis’ Taxation Practice. His diverse transportation taxation experience includes state sales and use tax strategies, motor carrier fuel taxes, vehicle registration related taxes, state highway use tax, property tax, and business restructurings.

Steve Pletcher directs the Firm’s federal and state employment tax section, regularly defending against IRS and state revenue department employment and unemployment tax controversies, including worker classification challenges and accountable plan employee expense reimbursement matters. Steve also directs the Firm’s employee benefits section.

Ron Morelock focuses on federal, multi-state, and local transportation-related tax issues and regulatory fees, business restructurings, and motor vehicle dealer licensing matters.

Becky Trenner’s practice primarily centers around state and federal employment and unemployment tax controversies, with a particular focus on defending the classification of transportation owner-operators as independent contractors.

Kelli Block regularly counsels motor carriers and transportation intermediaries on a wide array of state and federal employment tax, wage and hour law, and regulatory issues that affect the transportation industry.

Scopelitis attorneys address complex taxation issues on a regular basis and assist clients with proactive tax planning and compliance issues. State and federal taxation can have a significant financial impact upon trucking operations in a variety of ways. Recently, our team has helped companies with issues ranging from:

• Identifying tax exemptions and refund opportunities
• Providing guidance on state and local tax matters
• Evaluating corporate business tax nexus standards
• Defending federal, state and local audit assessments
• Procuring voluntary disclosure and tax amnesty agreements
• Providing property and ad valorem tax guidance
• Advising on IRP and IFTA issues
• Assessing federal excise tax issues

To learn more about how Scopelitis’ Taxation Practice can help your business, please visit the practice area page.

The Tax Law and Motor-Carrier-Sponsored Per Diem Plans

The Act suspended the ability of employee truck drivers from itemizing deductions related to meal and incidental expenses they incur while on the road. But the Act did not affect a motor carrier’s ability to treat the amount of an over-the-road driver’s compensation that accounts for those expenses as nontaxable under a properly structured per diem plan. As a result, some pundits are encouraging motor carriers to make more aggressive use of per diem programs to increase interest among potential new hires.

While the Act’s suspension of itemized deductions renders sponsorship of a per diem program more attractive on some levels, caution is warranted! The IRS has traditionally taken a dim view of these plans and may perceive the change in the deductibility of per diem expenses by individual employee drivers as a means to undercut the ongoing viability of such plans.

Caution is also warranted on the wage and hour front. A driver’s participation in a properly structured per diem program does not impact the motor carrier’s obligation to comply with federal minimum wage laws and pay the driver a proper rate.  The plaintiffs’ bar has doggedly pursued motor carriers in an effort to prove otherwise.  The Firm anticipates that some will view the Act’s changes as an opportunity to revisit the impact of per diem plan participation on minimum wage law compliance.

While the Act did not change the motor carrier’s side of the balance sheet when it comes to properly structured per diem plans, motor carriers must ensure their per diem plans are carefully structured to withstand increased scrutiny by adversaries.

Like-Kind Exchange

Under the prior tax law, owners of investment and business property could defer paying tax on gains if they exchanged property held as an investment or use in the taxpayer’s trade or business for property of a “like-kind” (1031 exchange). The Act retains like-kind treatment for real estate exchanges.  However, after December 31, 2017, tax deferment for transactions involving personal property is no longer available.  Therefore, motor carriers and others in the transportation industry will no longer be able to defer gains and losses through like-kind exchanges of trucks and other transportation equipment. While this seems detrimental, the impact may be temporarily mitigated by the 100% bonus depreciation allowance.

Temporary 100% Expensing

For qualified property acquired and placed in service after September 27, 2017, and before 2023, the Act temporarily increases the additional first-year bonus depreciation percentage from 50% to 100% with the percentages phasing down annually through 2026.  The law extends the bonus depreciation opportunity to qualified used property as well, provided the purchaser had not previously used the property, and the property was not acquired from a related party.  Given the availability of an immediate deduction on used assets, buyers and sellers may want to explore the possibility of mutually beneficial means to structure transactions as asset deals.

Business Income Tax Rates

The centerpiece of the Act, which became effective on January 1, 2018, is a permanent reduction to the corporate income tax rate from a maximum rate of 35% to a flat rate of 21%.  Congress intends this change to make the U.S. tax system more competitive with other nations.  Because the Act repealed or modified a number of existing provisions (e.g., limits on like-kind exchanges and interest expense deductions), the overall impact on businesses is less clear.  In addition to permanently lowering corporate tax rates, for tax years 2018 through 2025, the law provides a temporary 20% taxable income deduction for owners of pass through entities (e.g., S-Corporations), subject to numerous limitations.  A pass-through entity’s taxable business income is taxed at the individual owner’s rate with a maximum rate of 37%, but when the 20% deduction is applied, this can lower the tax rate to 29.6%.  The new rates may affect business structuring and choice-of-entity options, and decision makers should also consider state income tax implications.