Carriers: The Importance of Tax Planning in Times of Uncertainty
There are few things that can ruin a day as quickly as a call from your accountant with the news that you owe more than expected on an upcoming tax deadline. Thankfully, there is an alternative to tax deadline surprises. With thoughtful tax planning in the third and fourth quarters, transportation companies can take control of their tax liabilities, which is of utmost importance during times of financial or economic uncertainty, and is crucial as we weather the current pandemic.
For transportation companies, the basics of income tax planning consist of the following analysis:
- Project financial statement income for the remainder of the year
- Update depreciation schedules for current year activity and forecast any remaining acquisitions/dispositions
- For cash method taxpayers, estimate end-of-year accounts receivable/accounts payable balances
- Review shareholder distributions and any changes to shareholder loan balances for tax consequences
- Consider any corporate acquisitions, unusual items, loss carryforwards, or changes to entity structure that will have a tax impact
The exercise of tax planning is important because a company’s financial statement income or loss generally does not reflect their taxable income or loss. Especially for a trucking company that typically has several significant book/tax differences such as depreciation, accrual-to-cash adjustments, and non-deductible expenses like per diem (20% non-deductible).
Of particular importance, this tax year could result in a large differential between book and tax income for several key reasons:
Equipment Purchases – Many trucking companies have not added or replaced equipment during 2020. Due to accelerated “bonus” depreciation, there may not be any tax depreciation remaining from purchases made in prior years. If your company is in this situation, to calculate your taxable income you must take your book income and add back all of the book depreciation deducted to arrive at your taxable income. Depending on the size of your fleet, this could be a significant adjustment.
Accrual-to-Cash Adjustment – Transportation companies that utilize the cash method of accounting need to monitor the year-over-year change in their accounts receivable and accounts payable balances. The net of those accounts represent the prior taxable income that has been deferred to a future tax period. If your business has declined due to economic conditions, accounts receivable has likely fallen. Correspondingly, if cash flow is tight, a company might request extended payment options from vendors, thereby increasing the accounts payable balance. The result is that some of the prior year deferred net income may become taxable this year.
Paycheck Protection Loan (PPP) – This CARES Act headliner has been a job saving cash infusion for many companies. Contrary to the spirit of the program, current guidance from the IRS dictates that while the forgiveness of the loan is not taxable income, the expenses paid with the proceeds are non-deductible for income tax purposes. Therefore, to calculate taxable income a company must add the amount of PPP forgiveness to their financial statement income. If not properly planed for, this add-back has the potential to cause heartache at tax deadline time.
There are many other examples of book/tax differences that might catch a company off-guard when converting financial statement income to taxable income. For a transportation company, the items above represent the greatest variation and require immediate attention. Taking into account only the aforementioned differences, it would be easily foreseeable to have a taxable income that is vastly in excess of the income shown on your financial statements.
If it has been determined that your company may have a significant taxable income this year, there is still plenty of time to take action. First, you should check into utilizing loss carryforwards to the fullest extent possible, which may require a capital infusion into a related entity. Second, you should revisit your equipment trade cycle and determine whether it makes sense to purchase equipment before the end of the year. Finally, there may be accounting method changes that your company could take advantage of to generate tax deductions. Many of these changes must be filed before the end of the calendar year, but some automatic changes can be filed with your annual tax return.
Regardless of the economic climate, tax planning is a valuable tool that all transportation companies should revisit each year with their accountant. Both short-range and long-term tax projections should be calculated and strategies forged. Sometimes a tax liability cannot be reduced, or in a period of rising tax rates, it might make sense to accelerate taxable income and pay tax today. In those cases, a tax projection offers companies months of advance notice to save for the liability and avoids any tax deadline surprises.
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