Consider these strategies to defer or increase income as your transportation company works through the year-end tax planning process.
Key insights
- As part of year-end planning, work with your CPA to identify limitations that can reduce or eliminate tax deductions.
- On the other hand, there are methods of accounting and other strategies that can be employed to increase income in 2020, too.
- Our tax professionals can answer questions about the tax reform proposal and devise a personalized year-end tax plan.
Need help with year-end tax planning?
2020 has certainly been filled with unprecedented challenges for the transportation industry. Depending on the segment served, many companies have been able to adjust well and will end the year on a fairly high note. However, year-end tax planning still presents some uncertainty.
Transportation companies normally have insight into the tax rates and laws for the upcoming year, which allows them to implement a common strategy of deferring income into the future. But given the unusual year, in addition to a new president on the horizon, taxpayers may be feeling uneasy about this strategy.
Instead of trying to predict what will happen, let’s look at what we know right now. As indicated in the chart below, President-elect Joe Biden has discussed raising taxes in his term. But if Republicans retain control of the Senate by winning one or both of the runoff election in Georgia, those familiar with the government process predict minimal tax changes in the next two years.
| Biden’s proposed tax plan | ||
|---|---|---|
| Current rate | Biden proposal | |
| Top ordinary income tax rate | 37% | 39.6% |
| Top capital gains rate* | 20% | 39.6% |
| Estate tax** | 40% | 45% |
| Corporate income tax | 21% | 28% |
**Lower $3.5 million estate tax exemption for individuals, $7 million for married couples, also proposed.
Source: Bloomberg Tax
However, if you’re worried about tax rates increasing in the immediate future, consider these strategies — whether you’re looking to defer income or increase it in 2020.
Strategies to defer income at year-end
Accelerate equipment purchases
Following tax reform, you can immediately write off the cost of new and used tractor and trailer purchases. If you plan to invest in equipment in 2021 anyway, consider accelerating those purchases so you can deduct the expense on your 2020 tax return. One additional requirement to keep in mind is the equipment needs to be in-service prior to the end of 2020.
Write off old or uncollectible receivables and harvest tax losses
Accrual method taxpayers may deduct uncollectible trade accounts receivable when the possibility of collection becomes remote or highly uncertain. Before the end of the tax year, carefully analyze your trade receivables and write off any uncollectible accounts.
Elect the overall cash method of accounting
Businesses with less than $26 million in combined gross receipts can generally adopt the cash method of accounting for tax purposes. The $26 million gross receipts threshold is applied on a combined basis for commonly owned businesses.
There is also a special provision for transportation companies with average gross receipts between $10 million and $50 million. Election of the cash basis means you are taxed on revenue when cash is collected and you deduct expenses when paid. So if receivables are higher than payables, income would be deferred into the future.
Under normal accrual accounting, you are taxed on income when you earn it or when it is due — even if it’s not collected — and you get a deduction for expenses even if you haven’t paid them yet.
Cost segregation of buildings
With any building acquisition, construction project, or renovation, you can usually defer tax liabilities and provide a cash flow benefit through a cost segregation study. These studies separate the various costs of the structures and land improvements into different depreciation methods and shorten the depreciable life categories, which accelerates your tax deduction for depreciation. The tax depreciation may be greater than the book depreciation methods used for your financial statements. The study typically makes sense when the project costs $500,000 or more.
Considering the availability of 100% bonus depreciation and the increase in Section 179 benefits, the benefit of completing a cost segregation study on your facility could be greater than ever.
Accelerate payment of bonuses or compensation
For tax reporting purposes, taxpayers can generally deduct fixed and determinable compensation amounts that are related to services performed in a tax year if the compensation is paid within 2 1/2 months following the tax year in which the services were provided. In some cases, compensation has to be paid by the end of the year to be deductible. Make sure you pay accrued bonuses or compensation in time to get the deduction in 2020.
Drive income to a loss to create a net operating loss
If you or your C corporation can generate a net tax loss during 2020, a Coronavirus Aid, Relief, and Economic Security (CARES) Act provision allows you or the C corporation to carry the loss back to offset taxable income during the previous five tax years. Utilize the strategies above to help generate a net tax loss. This would generate a refund of taxes paid in earlier years. In many cases, the IRS will pay those refunds within 90 days, which provides immediate cash flow benefits.
Strategies to increase income in 2021
Depreciation — delay delivery of equipment
Push the delivery of newly purchased tractors and trailers into 2021 to delay the start of depreciation, which can be anywhere from 20% to 30% on the low end in the first year. If you can’t push back the delivery date, you could opt out of 100% bonus depreciation and Section 179 to slow down the depreciation. You could also consider electing into using the Alternative Depreciation System (ADS) for the year, which generally has longer lives than they do under the General Depreciation System.
Operating under the cash method of accounting
If you currently operate under the cash method of accounting, navigate income as you normally would at year-end. However, instead of paying down payables and accruals and/or prepaying insurance and licenses by year-end, look to pay these items after year-end. When you defer the payment of these after year-end, the tax deduction shifts into next year.
Operating under the accrual method of accounting
If you currently operate under the accrual method of accounting, look at how employee bonuses are structured. Typically, these are deductible in the current year if they are fixed and determinable as of year-end and paid within 2 1/2 months after year-end. If the bonuses can be structured to not be fixed as of year-end, the deduction falls in the year when paid.
Accounting method changes — overall accrual method
If you currently operate under the overall cash method of accounting, you could make an automatic accounting method change to the overall accrual method. The overall cash method of accounting typically allows businesses to defer income into the future. If you change from the cash method to the accrual method, the income deferral needs to be picked up into income, usually over a four-year period.
Example: ABC Trucking, Inc. elects to change to the overall accrual method of accounting since they will have a $1 million adjustment to income in the year of change. The $1 million income adjustment will be taken into income over four years, or $250,000 per year, beginning in the year of the change.
Carefully consider this strategy with your tax advisor, since there are some potential long-term implications (likely a five-year commitment and it may phase you out of getting back on the cash method in the future as noted above).
How we can help
Consider your personal tax situation before you implement any of these strategies. Everyone’s situation is different. Our tax professionals can answer your questions regarding the tax reform proposal and devise a personalized year-end tax plan to help you take advantage of potential opportunities.
CLA’s transportation and logistics professionals can also work with you to assess your current structure and any future business transactions to help you understand the impact of the new tax law. Whether you need a short consultation or full support throughout the process, we’re here to help.