Allowing smaller fleets to benefit from lower corporate rate one of many positives
On the surface, many of the nation’s largest trucking fleets woke up happy this morning following President Donald Trump’s proposal to lower the corporate tax rate to 15% as part of his tax overhaul announced Wednesday. Smaller fleets and owner-operators, who make up more than 90% of the nation’s trucking companies, also have reason to cheer because of Trump’s proposed flow-through income tax.
And that is just a small portion of the benefits to those in trucking. It’s important to note, however, that details on Trump’s plan are scarce and many Republicans are not happy with the outline, so whether the plan goes anyway in Congress is very much up in the air.
Still, there are reasons to smile this morning if you work in the trucking industry.
“Most of the C-corp [registered fleets] are in the highest tax bracket so they will see a big [positive] impact,” Randy Hooper, a director with tax firm Katz, Sapper & Miller’s Transportation Group, told FreightWaves.
Katz, Sapper & Miller’s transportation clients tend to skew toward smaller, closely-held, family and owner-operator businesses, a group that he says could potentially see an even bigger impact because of Trump’s flow-through tax.
“Flow-through activities are taxed through the income of the company [now],” Hooper notes. Under Trump’s proposal, any company that is registered as an LLC might be able to flow that income through to the individual owner(s) and have it taxed at the 15% corporate tax rate rather than at the higher individual tax rates of 25% or 35%.
“The 15% business tax rate could open a huge loophole for people to receive business income through a limited liability company or other pass-through entity instead of as wages,” wrote the New York Times in an analysis. “Depending on how the law is drafted, that could enable some people to pay that low 15% rate on their earnings instead of an individual income rate up to 35%. People who already receive their income through investment vehicles wouldn’t have to change anything for a windfall.”
Of course, trucking fleets of all sizes would see their corporate tax rate cut slashed from 35% to 15%. House Republicans have proposed a 20% corporate rate. Also, under some Republican plans being floated in the House, businesses would be able to immediately fully deduct the full value of equipment purchased.
In Trump’s original tax draft, he proposed allowing a deduction of up to $1 million in new equipment purchased each year. The law currently caps that amount at $500,000. There was no mention of this proposal in Wednesday’s release, so Hooper is unsure whether a change is possible.
Another big win for trucking fleets may come from the lack of a “border adjustment tax” (BAT). Anyone involved in importing goods, particularly retailers, breathed a small sigh of relief because of the missing BAT, but it would also affect equipment prices in trucking with many truck manufacturers and suppliers either building some or all of their products, or sourcing components, from foreign countries, particularly Mexico.
A BAT would place additional taxes on products imported into the U.S. and could hit equipment that sources foreign parts. Any tax would likely be passed along to end customers through increased prices. A BAT is still being considered by some members of the House as they work to draft a tax plan.
Hooper also notes the proposed repeal of a 3.8% Obamacare tax on investment incomes over $250,000, which he says hits passive incomes and affects a number of trucking company owners.
“If you own a trucking company, it’s very easy to have a passive interest,” he says. “Even if you are a majority owner but don’t meet the [IRS’ minimum work] hours requirement, you are still responsible for that Obamacare tax, so there are a lot of people that got dinged.”
Trump’s proposed repeal of the alternative minimum tax is another boon to companies, Hooper adds.
“There’s a lot of middle class taxpayers paying the AMT,” he notes. “Unfortunately, it affects trucking companies because one of the AMT’s add-backs is appreciation and it is really hard for trucking companies to predict their appreciation.”
Also, Trump proposed eliminating the so-called “death tax”, otherwise known as the estate tax. Here, Hooper notes the big difference for families under Trump’s proposal and that of Hillary Clinton’s.
Currently, the death tax is triggered on estates of greater than $5 million. Clinton’s proposal would have reduced that to $3.5 million and upped the tax rate to 65%.
“If no laws are changed, in 2017, 5,000 taxable filings would be affected by the death tax,” Hooper says. “Decreasing that [under Clinton’s plan] would have affected tens of thousands of individuals.”
On the individual taxpayer front, high income and low income earners will benefit from the elimination of several tax brackets. Currently, there are seven brackets, but Trump’s plan would reduce that to three with a top bracket of 35%, down from 39.6% for a married couple making more than $476,000. The bottom rate would be 12% and all taxpayers would benefit from a doubling of the standard deduction, to $24,000 for married couples. However, Trump proposed eliminating many of deductions individual filers can claim. The charity deduction would remain, though.
According to the New York Times, those individuals who live in states with high taxes would come out losers because Trump’s plan eliminates the federal tax deduction for state and local income taxes. This could affect the owners of many smaller trucking companies located in those states.
One of the other benefits to businesses is the move to a territorial tax plan where businesses would be taxed only on profits earned in the U.S. Trump has proposed a “one-time” tax for overseas profits.