Tax plan fallout: Will it lead to more independent contractors or leased drivers?

With all the cheering from business over passage of the Republican tax plan, the next step in the tax reform journey has now begun: the real-world impact.

Kevin Rutherford, owner of Let’s Truck and a business, financial and tax consultant to small trucking firms and owner-operators, tells FreightWaves that for the industry and its people, the tax plan is a good deal.

“Ninety-five percent of people in the industry will pay less in taxes in 2018,” he says. However, Rutherford does see a potential unforeseen impact – the possibility of an increase in lease purchase plans and the use of independent contractors.

Rutherford says that he is big proponent of owner-operators and remains so, but adds that he is not such a big fan of lease arrangements, feeling that historically, carriers have taken advantage of truck drivers who desire to own their own rigs but don’t have either the financial means or business acumen to make such an arrangement work.

But the tax law offers incentive to carriers to go this route, although it remains to be seen how many might choose this path. The new tax deduction on earnings for those businesses that are registered as pass-through corporations, as many small trucking companies and owner-operators are, provides an enticing option to own your own business. Because of this, Rutherford envisions a possible scenario where fleets could offer company drivers the option to enter into a lease arrangement or shift them operate as independent contractors.

“There is no tax on the first 20% of revenue” for pass-through corporations, he explains. “That’s a huge savings.”

In a LinkedIn post, Rutherford suggested that a carrier that switches drivers to independent contractors could save between $10,000 and $15,000 per driver in costs. Again, it’s that 20% pass-through deduction that carriers could use as a carrot.

The lease option is a major concern of his, as Rutherford says that over his years in the industry, he has seen many people taken advantage of under these scenarios. “A lot of the risk in equipment [costs for carriers] goes away,” he says. “Now [the fleet] can say to the driver, ‘now you can have all these deductions and be an owner-operator.”

To a fleet, a lease arrangement may be a financial windfall. With the new tax plan allowing companies to deduct 100% of the cost of capital expenditures in the first year (up to a maximum dollar amount], there is incentive for carriers with cash on hand to acquire new tractors in 2018. To turn around and lease those tractors to drivers then absolves carriers of many other expenses related to the truck as well as the driver, such as worker’s comp insurance, Social Security, health insurance, etc. The driver would, presumably, be paid more to compensate for their new out-of-pocket expenses, but the carrier would lower its overall costs.

The challenge, Rutherford explains, is making sure the driver who switches to this model understands the model. “I just think they are awful, no matter how great you make the program,” he says. “You take a guy with no money, no experience and put them in the most expensive truck and they have [no idea how to manage the costs].”

Complicating matters, though, is another scenario that Rutherford is afraid will take place, and that is switching of drivers to an independent contractor model. The model has been under fire in recent years, particularly when it comes to port trucking, which relies heavily on this model. In fact, the city of Los Angeles this week filed a lawsuit against three port trucking companies claiming they are illegally classifying drivers as independent contractors. A USA Today investigative report in 2017 found that many independent contractors are paid less than minimum wage and saddled with expensive payments on their tractors that they can’t make.

“The idea that you can just take a driver and make them an independent contractor” is wrong, Rutherford says, but notes that it might be to a carrier’s advantage to move to an independent contractor model.

With that said, Rutherford strongly believes in the owner-operator model, and the new tax plan is a boon to those truckers. “The owner-operators who get it, stay on top of it, are ecstatic [about the tax plan],” he notes.

Previously, Rutherford explains, owner-operators set up as a pass-through business as most are, could theoretically switch to an corporate setup once they are making about $65,000 per year in net profits. That is about when the costs make sense. With the new 21% corporate tax rate, there are many owner-operators looking into making that switch, as the pass-through tax rate is slightly higher at 25%. Rutherford, though, says that the 20% deduction added to the bill offsets some of this and means an owner-operator would need to be pulling in a minimum net profit revenue of about $100,000 before a switch is necessary. At that level, a driver could save roughly $7,000 in taxes under the new plan, Rutherford suggests, noting that is just a rough estimate and individual tax status and filings will change this amount for each individual.

None of this is to suggest either a lease arrangement or owner-operator model is wrong for any individual, but the broader point is the new tax law creates some interesting possibilities and it will bear watching to see how carriers will respond.

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