New IRS Tax Rules on Assets to Affect Fleets, Experts Say

This story appears in the Dec. 2 print edition of Transport Topics.

New tax rules that start Jan. 1 will change the way trucking companies and other U.S. businesses account for real estate and business equipment and could create room for more same-year deductions rather than multiyear depreciation, according to several tax experts.

Some trucking financial managers said they have already met with their accountants and are updating their financial policies.

“If you can deduct it immediately, you’ll recover the expenditure faster. Otherwise, it could take several years to recoup it,” said CPA Christopher Bradburn of Indianapolis accounting firm Katz, Sapper & Miller, which represents about 95 U.S. trucking companies.

The rules were issued in an Oct. 21 Internal Revenue Bulletin to clarify for taxpayers and IRS auditors what sort of spending by businesses can be deducted immediately and what is considered a capital good that should be written off over a period of years. Known as Tax Decision 9636, the rule could be particularly important for less-than-truckload carriers, which have large real estate holdings for their networks of terminals.

While purchases of highway tractors usually are depreciated on a three-year schedule, the tax life for buildings is 39 years, and that makes expensing of spending very valuable, said Joe

Parrish, a tax partner in the Charlotte, N.C., office of ac-counting firm Grant Thornton. One year versus three years for a truck is a small change, but one year versus 39 years is a very big change, he said.

“For most taxpayers, there will be opportunities to drive deductions,” Parrish said.

Parrish said TD 9636 has been under development since 2008, and parts of it seem “too good to be true.” He said the IRS lost a number of tax court cases on depreciation-deduction matters over the years so a rule to provide greater clarity was necessary.

TD 9636 also divides businesses into three types of taxpayers based on the sophistication of the company’s financial reporting.

A Katz, Sapper & Miller analysis for its clients said the companies that can be most aggressive in expensing purchases are publicly traded firms that have to file an annual 10-K report with the Securities and Exchange Commission or a privately

held firm that pays for a certified, audited annual financial statement and has a written policy in place on deductions and depreciation.

Under the terms of the “de minimis safe harbor” segment, such a company can purchase items worth $5,000 each and write them off in the same year. For example, the KSM analysis said a company could buy 100 computers for individual employees at $4,950 each and deduct the entire $495,000 purchase as an expense.

If a carrier does not do an annual certified audit — but does have a written depreciation-deduction policy in place — the cap falls to $500 per item from $5,000. Without even a written policy on deductions and depreciation, the per-item cap falls to $200.

Two large carriers with certified audited statements and written policy statements said they are in discussions with their accountants but don’t expect major changes in the way they record and organize financial information.

“I’m talking to our CPAs about this next week,” said Ted Rehwald, vice president of finance for Trans-System Inc. of Spokane, Wash., on Nov. 21.

“We haven’t reviewed the regulations well, but we don’t anticipate too great a problem,” said Robert Ragan, chief financial officer of flatbed carrier Melton Truck Lines in Tulsa, Okla. He said his company has long had an audited statement and a written deduction-depreciation policy in place.

For smaller carriers, the process is more daunting, said Terry Croslow, CFO of Venture Express in La Vergne, Tenn.

“I’ve been rewriting our policy to take advantage of the de minimis rule and keeping an eye out for items to capitalize, but I think there’s a lot of lost productive time spent to comply,” Croslow said after going through much of the 73-page rule.

For carriers with $30 million to $50 million in annual revenue, certified audits are not typical, said Croslow, a former chairman of the National Accounting & Finance Council of American Trucking Associations.

Routine maintenance to repair a truck terminal clearly is  deductible, Grant Thornton’s Parrish said.

The key considerations now for what must be capitalized over time, Parrish said, are tests for betterment, restoration or adaptation. If a building is made significantly better, restored to usefulness or adapted to a better purpose, then an investment has been made that must be capitalized, he said.

For regular maintenance, though, including the replacement of loading dock doors that get battered through regular use, such items can be expensed immediately, Parrish said he has advised his trucking clients.

“These rules give companies an opportunity to take a second look at their policies on these issues,” he said.

Parrish and KSM’s Bradburn agreed that carriers should have written policies on deductions and depreciation in place by the beginning of their tax years. Without a written policy in place a company cannot take advantage of safe harbor rules offered in 9636.

Bradburn also said that bonus depreciation, which has been popular in trucking, probably will expire at the end of this year unless Congress acts to extend it. He said his company has been advising trucking clients to try and put new trucks into service before the end of this year, if possible, rather than waiting until the first quarter of 2014.