A Clear Picture
You can capitalize on the Tax Reform’s opportunities with thorough planning.
By Randolph Smith, Douglas Wood and Russell Norris
Now that the Tax Reform and Jobs Act of 2017 has officially been signed into law, there is a clearer picture of the effect it will have on transportation and logistics companies. The new tax law greatly reduces corporate rates, sets new limits on the deductibility of interest, offers full expensing on qualifying new and used equipment purchases, repeals like-kind exchanges on equipment and the itemized deduction for unreimbursed employee driver expenses, and has a number of international taxation implications. These complex changes require detailed analysis and provide ample tax-planning opportunities. Many tax decisions made during 2018 will have long-term ramifications, making it essential for companies to understand the nuances of tax reform and how each item will affect their business.
The biggest impact for C corporations is the federal tax rate reduction to 21 percent. Companies paying cash tax will realize significant tax savings from this lower rate and will have the opportunity to reinvest in their business, pursue merger and acquisition activity, or increase shareholder returns.
Companies should consider tax accounting method opportunities before filing 2017 tax returns. Any deferrals of income or acceleration of deductions create permanent tax savings as a result of the decrease in tax rates. It’s not too late to take advantage of automatic tax accounting method changes and tax planning opportunities for 2017.
There have also been significant changes to the tax treatment surrounding fixed assets. Most notably, the new tax law provides 100 percent bonus depreciation for qualifying property placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation rate will then phase out by 20 percent each year over the five succeeding years until it is no longer allowed starting in the 2027 tax year.
Used property also will be eligible for bonus depreciation, providing significant savings opportunities for transportation companies buying used equipment. The favorable depreciation rules provide an enormous opportunity to minimize taxable income over the next five years.
While these opportunities are enticing, there are also a few disadvantages of the new tax law, one of which relates to the like-kind exchange provision. Companies can no longer defer gains on exchanges of revenue and other equipment and personal property after 2017. Like-kind exchanges are now limited to exchanges of real property only. This may not be as significant in the near term with full expensing, but companies must carefully plan for it over the longer term as the favorable bonus depreciation terms sunset.
During deliberations of the many versions of this bill, there was uncertainty surrounding the deductibility of driver per diem. In the final version, the deduction at the entity level for employee drivers remained intact at 80 percent. The itemized deduction at the individual level, however, was repealed.
Any per diem or other unreimbursed business expense will no longer be allowed as an itemized deduction by employee drivers on their personal tax returns. Without a company driver per diem program, this change could push employee drivers to seek other employment opportunities, either as an independent contractors or as an employee for a company that has a driver per diem program in place.
For transportation and logistics companies with foreign income and/or operations, tax reform ushers in a number of important changes:
• As the United States transitions from a worldwide system of taxation to a semi-territorial system, foreign earnings not yet subject to U.S. tax may be subject to a one-time “toll tax.” For calendar-year taxpayers, this tax is due with 2017 tax returns.
• Introduction of a dividends-received deduction for certain foreign earnings of controlled foreign corporate subsidiaries. This positive change is somewhat offset by new U.S. global minimum tax rules designed to tax currently non-U.S. income above a 10 percent return on non-U.S. depreciable assets.
• New incentives providing aggressive effective tax rates on certain foreign source income earned by domestic companies.
• Reinforced rules to reduce or eliminate the tax advantages associated with certain deductible payments made to foreign related parties.
Collectively, these rules are complex and will require heightened levels of reporting and compliance. In return, many U.S.-based companies may enjoy lower effective tax rates. Fully realizing these benefits will require consultation with an advisor that has both tax and industry expertise.
Transportation and logistics companies stand to benefit from many favorable aspects of tax reform, but it could also present traps to those that do not fully consider its short- and long-term effects. To balance the risks and rewards, companies should undertake careful analysis and planning for the impact of the new law on both current and future cash flow.
Now that the Tax Reform and Jobs Act of 2017 has officially been signed into law, there is a clearer picture of the effect it will have on transportation and logistics companies. The new tax law greatly reduces corporate rates, sets new limits on the deductibility of interest, offers full expensing on qualifying new and used equipment purchases, repeals like-kind exchanges on equipment and the itemized deduction for unreimbursed employee driver expenses, and has a number of international taxation implications. These complex changes require detailed analysis and provide ample tax-planning opportunities. Many tax decisions made during 2018 will have long-term ramifications, making it essential for companies to understand the nuances of tax reform and how each item will affect their business.
The biggest impact for C corporations is the federal tax rate reduction to 21 percent. Companies paying cash tax will realize significant tax savings from this lower rate and will have the opportunity to reinvest in their business, pursue merger and acquisition activity, or increase shareholder returns.
Companies should consider tax accounting method opportunities before filing 2017 tax returns. Any deferrals of income or acceleration of deductions create permanent tax savings as a result of the decrease in tax rates. It’s not too late to take advantage of automatic tax accounting method changes and tax planning opportunities for 2017.
There have also been significant changes to the tax treatment surrounding fixed assets. Most notably, the new tax law provides 100 percent bonus depreciation for qualifying property placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation rate will then phase out by 20 percent each year over the five succeeding years until it is no longer allowed starting in the 2027 tax year.
Used property also will be eligible for bonus depreciation, providing significant savings opportunities for transportation companies buying used equipment. The favorable depreciation rules provide an enormous opportunity to minimize taxable income over the next five years.
While these opportunities are enticing, there are also a few disadvantages of the new tax law, one of which relates to the like-kind exchange provision. Companies can no longer defer gains on exchanges of revenue and other equipment and personal property after 2017. Like-kind exchanges are now limited to exchanges of real property only. This may not be as significant in the near term with full expensing, but companies must carefully plan for it over the longer term as the favorable bonus depreciation terms sunset.
During deliberations of the many versions of this bill, there was uncertainty surrounding the deductibility of driver per diem. In the final version, the deduction at the entity level for employee drivers remained intact at 80 percent. The itemized deduction at the individual level, however, was repealed.
Any per diem or other unreimbursed business expense will no longer be allowed as an itemized deduction by employee drivers on their personal tax returns. Without a company driver per diem program, this change could push employee drivers to seek other employment opportunities, either as an independent contractors or as an employee for a company that has a driver per diem program in place.
For transportation and logistics companies with foreign income and/or operations, tax reform ushers in a number of important changes:
• As the United States transitions from a worldwide system of taxation to a semi-territorial system, foreign earnings not yet subject to U.S. tax may be subject to a one-time “toll tax.” For calendar-year taxpayers, this tax is due with 2017 tax returns.
• Introduction of a dividends-received deduction for certain foreign earnings of controlled foreign corporate subsidiaries. This positive change is somewhat offset by new U.S. global minimum tax rules designed to tax currently non-U.S. income above a 10 percent return on non-U.S. depreciable assets.
• New incentives providing aggressive effective tax rates on certain foreign source income earned by domestic companies.
• Reinforced rules to reduce or eliminate the tax advantages associated with certain deductible payments made to foreign related parties.
Collectively, these rules are complex and will require heightened levels of reporting and compliance. In return, many U.S.-based companies may enjoy lower effective tax rates. Fully realizing these benefits will require consultation with an advisor that has both tax and industry expertise.
Transportation and logistics companies stand to benefit from many favorable aspects of tax reform, but it could also present traps to those that do not fully consider its short- and long-term effects. To balance the risks and rewards, companies should undertake careful analysis and planning for the impact of the new law on both current and future cash flow.
Randolph Smith is a partner in Grant Thornton LLP’s Tax Services practice and the national leader of its Transportation, Logistics, Warehousing and Distribution practice.
Douglas Wood is national managing principal of International Tax Services for Grant Thornton.
Russell Norris is the national Transportation and Logistics practice leader for Grant Thornton. For more information, visit www.granthornton.com.