Unless you’ve just woken up from a coma, you know that Congress passed, and President Trump signed a brand-new tax bill. Known as the “Tax Cuts and Jobs Act”, the bill, will cut income tax rates and double the standard deduction while reducing itemized deductions. Vastly changing child care, elder care, and business taxes. As most trucking companies are small, family owned businesses, here is a brief overview of how the new tax bill may affect you.
For larger firms the corporate tax rate is now a flat 21%, down from 35%. The purpose of this is to encourage big businesses to bring offshore money back to the US. For smaller firms, most of whom are organized as S-corporations, LLCs, and sole proprietorships, and subject to tax through the owner’s individual taxes, the new bill gives them a 20% deduction. Individual rates were lowered as well with the highest rate decreasing to 37% from just under 40%. The other individual tax rates are: 35%, 32%, 24%, 22%, 12%, and 10% depending on income. Individuals now making over $500,000 are taxed in the highest percentage. The idea is to benefit small business owners by encouraging investments and allowing them to deduct the cost of depreciable assets in one year versus amortizing them over several. So, for trucking companies who held off on updating equipment, now might be a good time to do so. Depending on the amount of debt you plan to take on.
The structure of the business may need to change as well. If structured as an S-Corp wages qualify, as a Partnership they don’t. Labor shifts are something to consider as well. If you are constantly fighting with the New York Department of Labor about your 1099’s, there may now be benefits to switch them to W-2s. This is certainly something for trucking firms to investigate.
One of the big potential burdens this bill places on small businesses is that deductions on interests are now capped at 30%. This deduction used to be unlimited. Another painful change is the limit of state and local tax deductions to $10,000. This will likely hit companies in the high taxed New York-New Jersey metro area hard.
Businesses may also benefit from an increase to the bonus depreciation allowance from 50% and 40% in 2017 and 2018 respectively to 100% for assets acquired and placed in service after September 27, 2017. The 100% deduction covers new and used qualifying property including: office furniture, computers, machinery, equipment, and qualified improvements.
A major part of this tax plan that has not gotten much press and threatens many small business owners is the Excess Loss Limitation. This is effective from 12/31/2017-1/1/2026. Losses in excess of $250,00 for an individual and $500,000 for couples filing jointly. These are the aggregate deductions of the taxpayer for a taxable year attributed to trade or businesses of the taxpayer over the sum aggregate gross income or gain for the year attributable to the businesses plus $250,000 (200% for a joint return) The un-allowed loss is treated as a net operating loss in the following year. Applied at the partner or S-corp shareholder level and after the passive activity rules. So, what does any of that mean? Let’s look at a hypothetical. Suppose this is you:
- Wages- $800,000
- Interest Income- $3,000,000
- Dividend Income- $1,000,000
- Business Loss- $-10,000,000
Under the new plan you are looking at a tax bill of $4,300,000 and a NOL of $9,500,000 for the next year. A bill you are unlikely to be able to pay.
Certainly, larger, public companies have seen windfalls from the tax law. The effect on small, privately held firms has not been reported much and it is probably to early to tell anyway. The best analysis we heard was from an accountant who said the better financial shape a company is in, the better the law will be for them.
*Please note that we are not accountants nor tax experts. This article is just meant to provide a snapshot of how the new law might affect you and your business based on the information we have. Consult your accountant or tax professional before getting too excited or upset.