By John Valle, CPA, MTax | Principal, Tax
The tax reform changes signed by President Trump in December 2017 are the most extensive overhaul of the tax system since 1986. With the changes came a lot of new buzzwords thrown around when discussing tax reform. While the provisions impact all types of businesses, what does it mean specifically for transportation? Let’s break down one key topic as it applies to our nation’s road warriors.
Choice of Entity
When establishing the type of business classification, the options available will have different impacts come tax time.
Here’s a breakdown of the types of classifications and the tax implications for each:
C-corporations pay tax at the corporate level and shareholders pay tax again on dividends paid from the company. This results in double taxation.
Corporate Level Tax rate:
Old Brackets – Prior to 2018
- 0 – 50,000 – 15%
- 50,000 – 75,000 – 25%
- 75,000 – 100,000 – 34%
- 100,000 – 335,000 – 39%
- 335,000 – 10,000,000 – 34%
New Brackets – 2018
- Flat 21% Tax Rate
Dividends are subject to a second level of taxation to the owner ranging from 15% – 23.8% at the federal level.
Pass-through entities (S-corporation, partnership, single member LLC)
Income (losses) pass through to owners are taxed at an individual level, meaning single taxation and dividends/distributions are generally not taxed again.
Since the income passes through to the owner, the tax will be calculated at the individual’s tax rate bracket, which will ultimately depend on the filing status (i.e. Single, Married Filing Joint, Married Filing Separately) and the level of income subject to tax. The rates currently range from 10% – 37%.
A new provision called the Qualified Business Income (QBI) Deduction will benefit most pass-through entity owners beginning in 2018. Individuals that are owners of pass-through entities are entitled to a deduction for qualified business income (QBI) which is equal to 20% of taxable business income.
Note that there are some limitations for certain businesses and the 20% QBI Deduction. The limitations include a 50% W-2 wage limitation or a 25% W-2 wage limitation + 2.5% cost basis of fixed assets (if applicable). Additionally, certain specified service businesses may not be eligible.
If ABC Trucking Co. is a pass-through entity and has $200,000 of qualified business income in 2018, the owners would be eligible for a QBI deduction of $40,000 (200,000 of QBI x 20%).
The lowering of personal income tax brackets under the new law, coupled with this new 20% QBI deduction, could result in a significant tax savings opportunity for owners that are properly structured.
What type of entity should I be?
Keep in mind with these changes, what may have always worked best before 2018 may not be the case now.
When considering changes to tax structure and entity classifications, you must consider both the short- and long-term plans for your fleet.
- Do you anticipate selling the business in the future?
- Is there a need for the business to retain capital and grow?
- Do you anticipate tax losses due to start-up or asset acquisition growth?
- Does your business qualify for the Qualified Business Income Deduction?
If you’ve answered yes to one or more, let’s run an analysis of your entity structure to ensure you’re optimizing your value and after-tax cash flow.
This is just one example of how the recent tax reform changes impact the trucking industry and steps to take to determine if a change in classification or entity type warrants consideration. All businesses are different – let’s discuss yours today to see if some adjustments can benefit your fleet.