Experts Say Tax-Saving Opportunities Abound for Trucking Companies, Despite Weak Profits

This story appears in the Nov. 30 print edition of Transport Topics.

This year has been tough on trucking profits, but a broad spectrum of accounting experts said there are many tax opportunities available to cushion the blow.

Nine tax and accounting professionals identified more than two dozen potential savings methods in interviews with Transport Topics.

These options include new tax-cutting strategies, faster depreciation opportunities and favorable tax treatment of assets. Experts also highlighted key state and employee tax issues.

“With the economy in the shape that it is, [companies] may think they have exhausted the need for federal tax planning because fewer and fewer have taxable income,” said Randolph Smith, transportation industry managing partner at Grant Thornton LLP. “In fact, the right time to do tax planning is times like these.”

Ken Evans, U.S. transportation and logistics leader for PricewaterhouseCoopers, agreed.

“As 2009 nears an end and industry profits are shrinking — or evaporating altogether — fleet executives should be paying even greater attention to tax and accounting issues,” Evans said.

One key change is a rule allowing faster depreciation of equipment, which lowers 2009 taxes, said Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants.

“If [truckers] put equipment in service by the end of the year, they will get a much faster write-off,” he said. “You can’t assume Congress will extend this. People should take advantage of this right now.”

A trip to a fleet terminal  from the dealer’s lot qualifies as putting equipment in service, Ochsenschlager said.

He said $425,000 in depreciation can be claimed this year for a $600,000 equipment purchase with a five-year life. The balance is spread over four years.

The rules affect purchases totaling up to $800,000, and benefits are diminished above that amount, he added.

Elsewhere, classifying workers as employees or independent contractors is a major issue, because the Internal Revenue Service plans to conduct 6,000 audits of businesses during 2010 and change the criteria for defining the difference, several experts told TT.

Taxes are affected because fleets have payroll and withholding taxes for employees, but not for contractors.

The IRS has indicated it will use new criteria, including operations and control over workers, to make the determination, instead of the 20-factor test used today, said Mike Muldoon, a tax partner at PricewaterhouseCoopers.

Increased audits might “have a disproportionate impact on smaller companies” that could feel forced to count workers as employees, Evans said, because they don’t want to risk fines or settlement costs that could be harder for them to afford.

“IRS is very famous for rolling over people,” Clint Harris, owner of K&R Harris Tax Service, Oklahoma City, told TT, as he urged fleets to keep careful track of expenses. “They are very famous for bullying you out of your deductions.”

A little-noticed provision of a Nov. 6 law extending unemployment benefits allows fleets with revenue more than $15 million to apply 2009 or 2008 losses to cut tax liability from up to five years earlier, when profits were higher.

The previous limit for that device, called “net operating loss carrybacks,” was two years.

Fleets with revenue less than $15 million can carry back losses from both years.

“2009 was not a good year for most trucking and logistics companies,” Evans said. “Companies should do anything they can to take advantage of carryback rules. This is something companies can do fairly quickly to protect their liquidity.”

Other regulations allow fleets to expense maintenance and repair items instead of capitalizing them, paving the way for a so-called “catch-up deduction,” Muldoon said. He added that move could increase the current annual loss and enhance the carryback’s benefit.

Timing is critical in other ways.

“Fleets have some critical decisions to make before they file [tax] returns,” Smith said, such as whether to take deductions and recognize revenue in 2009 or 2010 as key accounting differences that affect taxes.

“If 2010 is a better year — and we hope it will be — that would be a better time to take the deductions” than if 2009 profits are slim or nonexistent, said Richard Mikes, managing partner at Transport Capital Partners.

“We are in a situation where we expect taxes will go up,” said Tim Almack, partner at Katz Sapper Miller. “Clients might try to move deductions to 2010 because they expect taxes will be higher in that year. A lot of them are trying to decide whether to slow down depreciation.”

Leasing can be attractive now, Mikes said, because lessors with tax liability can benefit by charging lower rates to lessees.

Another equipment-related opportunity is minimizing the number of licensed trucks during difficult times, he said.

Fleets’ current financial challenges also require attention.

“We want to be sure they have the working capital to survive,” Almack said.

One area of concern, he said, is whether banks view companies that have sought or received waivers from loan covenants as a going concern.

Ochsenschlager said fleets whose debts have been modified by lenders can delay reporting any income arising from that modification until 2014.

Mikes, former chief financial officer of Ruan Leasing, offered a different perspective.

“I just don’t think people should be looking solely for tax deductions,” Mikes said. “It is more important for them to conserve the cash. If you are really managing cash properly right now, why would you spend $1 to get a 35-cent rebate [tax deduction]?”

Evans of Pricewaterhouse-Coopers had a similar view: “In the economy that we have had and continue to have, cash and access to cash and credit are extremely important for all transportation companies, no matter what their size.

“Until we see freight movement increasing, we are still in a very cautious and conservative management process of trying to conserve cash,” Evans said.

Bob Pitcher, a vice president with American Trucking Associations, urged fleets to take a broader perspective and pay attention to national tax issues now being debated in Congress, such as health care and climate change that would raise taxes and costs.

Another issue, he said, will be how to pay down a federal deficit swollen by stimulus spending.

Muldoon also spotlighted so-called “cost segregation,” which permits faster depreciation of portions of a larger asset such as a warehouse or major acquisition.

Property such as dock doors inside a warehouse can be depreciated in as little as five years, although the larger asset might have a 39-year life.

In a merger, Muldoon said, transaction cost analysis or similar items can be amortized, offering savings that aren’t available if they are treated as goodwill. That’s effectively the excess amount paid for an acquisition above the value of tangible assets.

Equipment valuations also are critical. Smith said differences between an asset’s tax value and its book value should be weighed with an eye toward deductions in the year it’s purchased.

So-called “like-kind exchanges,” in which companies that trade aging equipment for newer models, can defer the recognition of the gain as a result of trading in the equipment, Evans said.

Almack noted that writing down equipment from its book value to its net realizable value if it is held for sale should be considered to lower expenses.

Other recommendations mentioned by the experts:

• Have — or obtain — expertise on tax/accounting matters.

• Evaluate whether selling out now despite low valuations could pay off from a tax standpoint.

• Be aware of alternative minimum tax exposure.

Mikes and Smith recommended that fleets assess their tax status as so-called “S” corporations or “C” corporations.

Mikes said one of the advantages of “C” corporations, which are popular with small family-owned fleets, is added flexibility in tax treatments on nontrucking income.

On the other hand, he and Smith said, the tax burden for an “S” corporation in the form of estate and gift taxes can be substantial and savings result from a conversion to “C” status.

Smith said switching to “S” status could save $70 million after tax for a $200 million annual revenue fleet with a steady growth rate, if principals sell out after 11 years have passed.