Many companies are continually facing challenges in their industries as influences
outside of their control may have negative effects on their profitability. In the
trucking and transportation sectors this is especially true. For example, a shortage
of qualified drivers is driving the cost of labor upwards. Increases in other costs
such as fuel also increases expenses. As interest rates move upward, the cost of
trucks and other equipment increases for those financing equipment purchases.
Trade wars are also increasing equipment costs and even replacement parts.
Facing these challenges, it is especially important for those in the transportation
industry to scrutinize costs and take advantage of laws, rules, and/or regulations
that may apply to them so as to increase profitability to offset rising costs. Once
such opportunity may be found in the new IRS Section 199A Pass-Through
Deductions.
Effective for tax years beginning after December 31, 2017 and before January 1,
2026, a taxpayer other than a “C” corporation is entitled to a deduction equal to
20% of the taxpayer’s “qualified business income (QBI)” earned in a “qualified
trade or business.” The IRS recently released 184 pages of highly anticipated
regulations which aim to clear up uncertainties in the law.
What is a “qualified trade or business?” It is designed to include all businesses
other than those of an employee and a so called “specified service business”
(“SSB”). Therefore an employee is not allowed the 20% deduction against wage
income.
The second category of income from a SSB is designed to prevent the conversion
of personal service income into qualified business income. The code defines a
specified service business as:
“…any trade or business involving the performance of services in the fields of
health, law, accounting, actuarial science, performing arts, consulting, athletics,
financial services, securities brokerage services, or any trade or business where
the principal asset of such trade or business is the reputation or skill of 1 or more
of its employees.” And “…any trade or business which involves the performance of services that consist of investing and
investment management, trading, or dealing in securities.”
Thus, a trucking company, freight broker, logistics company, warehousing business, limousine or busing
company would be considered a “qualified trade or business”.
What is qualified business income? Once a taxpayer established they are a qualified trade or business,
they must determine the qualified business income for each separate business.
Qualified business income is defined as the net amount of qualified items of income, gain, deduction and
loss with respect to a qualified trade or business that is effectively connected with the conduct of a business
within the United States. Qualified business does not include, however, certain investment related income
such as for example, with some exceptions:
In addition, qualified business income does not include:
The decision to exclude wages paid to a shareholder and guaranteed payments to a partner from qualified business income put these entity types at a disadvantage relative to sole proprietors at certain income
levels. Since guaranteed payments are not considered wages, an S-corporation may allow for a higher wage limit (described below) than a similarly situated partnership or LLC.
Determining the 20% Pass-Through Deduction
W-2 and Qualified Property-Based Limitations Based on Taxable Income
A taxpayer other than a “C” corporation is entitled to a deduction equal to 20% of the taxpayer’s “qualified
business income” earned in a “qualified trade or business.”
The deduction is limited for taxpayers with income in excess of a threshold ($315,000 for married and $157,500 for all others), however, to the greater of:
The resulting deduction is then subject to a second limitation equal to 20% of the excess of:
The purpose of this overall limitation is to ensure that the 20% deduction is not taken against income taxed at preferential rates.
Example: In 2018, Taxpayer A generates $400,000 from his trucking business. Taxpayer A and his wife
file joint returns. In addition to the $400,000 of qualified business income from his trucking business, the
married couple have $100,000 of long-term capital gain and $30,000 of deductions, resulting in taxable
income of $470,000. The Section 199A deduction is limited to the lesser of $80,000 (20% of $400,000) or
$74,000 (20% of $370,000, the excess of taxable income over net capital gain of $100,000).
EXCEPTION to W-2 and Qualified Property-Based Limitations Based on Taxable Income
The above limitations do not apply when taxpayer has taxable income for the year of less than $315,000 (if married filing jointly, $157,500 for all other taxpayers).
The deduction for taxable incomes below these thresholds is only subject to the second limitation noted
above.
Taxpayers in a Specified Service Business
These SSB taxpayers can only take a full deduction if taxable income is less than the thresholds. A partial deduction is allowed when the thresholds are exceeded and will be completely phased out when taxable
income reaches $415,000 if married filing jointly and $207,500 for all other taxpayers. Once the phase-out is reached no deduction is allowed for SSB’s.
Considerations for the Transportation Industry
Takeaway
As one can plainly see, the regulations are complex and will require careful planning. We have not attempted to dive deep in this article and cover all 184 pages of the proposed regulations, instead however, we hope we have popped the hood and ask that you look inside with us