Retroactive Changes to Section 179 Provide Refund Opportunities for Trucking Industry
- Minnesota legislators only conformed to pieces of the TCJA bill, passed in 2017, which created heartburn for taxpayers.
- In October, a new law was passed which now conforms Minnesota to the Federal Section 179 deduction limits in the TCJA bill.
- With the new law, you may also amend your 2018 and 2019 tax returns to not addback Section 179 deductions taken on property that would have qualified for like-kind exchange treatment under the rules prior to the TCJA.
- Consider utilizing Section 179 expensing instead of bonus depreciation since this will not require an 80% addback on your Minnesota tax return.
Need help navigating the new Minnesota law?
For nearly three years, Minnesota has been struggling with the difficult challenge of how to conform state tax laws to changes made to the Federal tax code. Since Minnesota requires legislation to update which version of the Federal tax code taxpayers are required to use as the starting point for state taxable income, the lag time in conformity has created challenges for businesses trying to comply. With a plethora of taxpayers, groups, and associations (MN Trucking Association included) lobbying for more conformity, the Minnesota legislature recently passed an amendment to address the conformity concerns. The latest amendment was a big one, conforming to the Federal Section 179 rules for 2020 tax returns. The Minnesota legislature also included a retroactive provision in the legislation to remove the 80% addback of Section 179 on equipment that would have qualified for like-kind exchange treatment under prior Federal tax law.
How did we get here?
The Tax Cuts and Jobs Act (TCJA) passed in late 2017, had some taxpayer-friendly provisions for the trucking industry. It reduced tax rates, increased the Section 179 limit to $1,000,000, and increased bonus depreciation to 100%. However, it also eliminated the ability of taxpayers to defer gains on equipment sold through like-kind exchanges. For Federal purposes, the elimination of like-kind exchanges had a minimal impact on most taxpayers, since taxpayers could expense the newly purchased equipment through the increased Section 179 limit or with 100% bonus depreciation.
For Minnesota taxpayers, the TCJA has created some heartburn. Minnesota legislators dug through the TCJA and only conformed to bits and pieces of the bill (such as the elimination of like-kind exchanges), while not conforming to the increased Section 179 and bonus depreciation limits. This piecemeal approach increased the Minnesota tax bill for taxpayers in the trucking and farming industries who had historically been able to defer gains on trading in equipment.
New bill signed into law
On October 21, 2020, Governor Walz signed H.F. No. 1 into law. This bill was primarily a bonding bill to help with infrastructure projects across Minnesota; however, buried within it was a key tax provision for which taxpayers had been lobbying to conform Minnesota law to key components of the Federal TCJA. For tax periods beginning on or after January 1, 2020, Minnesota will now conform to the Federal Section 179 deduction limits. Under prior law, taxpayers have been required to add back 80% of their Federal Section 179 deduction on their current year Minnesota tax return and then were provided a deduction of this amount over the following five years. This means that, effective for 2020 tax returns, there will not be an addback for any Federal Section 179 deduction taken by a Minnesota taxpayer. Prior Section 179 addbacks will continue to be subtracted under the five-year period.
The new law also goes a step further with a narrow retroactive provision for property acquired in a like-kind exchange in tax years beginning in 2018 for qualifying depreciable property. “Qualifying depreciable property” is defined as property acquired in a like-kind exchange in which the exchanged property did not qualify for a gain deferral due to the elimination of the deferral under the TCJA. Any subtraction taken for this qualifying depreciable property now allowed to be fully expensed must be recomputed to take into account the retroactive application of full expensing for that property. In laymen’s terms, the new law allows taxpayers to amend their 2018 and 2019 tax returns to not addback Section 179 deductions taken on property that would have qualified for like-kind exchange treatment under the rules prior to the TCJA.
How these changes can impact you in an example
ABC Trucking (“ABC”) is a Minnesota S Corporation with a sole shareholder, Peter Mack, who is a Minnesota resident. ABC has a fleet of 50 tractors, and is on a five-year trade-in cycle with these tractors. In 2018, ABC traded in 5 old tractors for 5 new ones, in their only equipment transaction of their year. Here are the additional facts of the transaction:
- The old tractors had an original cost of $700,000.
- ABC had taken $650,000 of depreciation on the old tractors, leaving them with a tax basis of $50,000 in the tractors.
- ABC received $200,000 of trade-in value on the old tractors.
- The new tractors would have an outright cost of $750,000.
On ABC’s originally filed 2018 S Corporation return, ABC recognized $150,000 of gain on the trade in of the old tractors. ABC also took $750,000 of Section 179 expense to help offset the gain recognized. Since ABC is an S Corporation, all of the income passes through to its sole shareholder, Peter Mack, to be reported on his individual return. On his Minnesota individual return, Peter was required to add back $600,000, representing 80% of the Section 179 expense deduction taken. Then, on his 2019 Minnesota individual income tax return, Peter was allowed a $120,000 subtraction (20% of the $600,000 addback in 2018).
With the new rule changes, Peter can go back and amend his 2018 tax return to reduce the Section 179 addback to be $0. This will reduce Peter’s Minnesota taxable income by $600,000, and create a refund for him. Peter will also have to amend his 2019 tax return to reduce his Section 179 subtraction by the $120,000 originally taken, which will increase his 2019 Minnesota taxable income and create an amount due. Peter will also not be allowed the $120,000 subtraction that he would have taken in tax years 2020 through 2023. Overall, this will create a net refund for Peter.
If ABC had ordinary income of $1,000,000 before the $750,000 Section 179 deduction, this is how the new law will impact Peter:
|Ordinary Income (from ABC K-1)||1,000,000||1,000,000|
|Section 179 Deduction (from ABC K-1)||750,000||750,000|
|Total Federal Taxable Income from ABC passed to John||250,000||250,000|
|Total Federal Taxable Income from ABC passed to John||250,000||250,000|
|MN Section 179 Addback (80% of S179 Taken)||600,000||-|
|MN Section 179 Subtractions (from pior year addbacks)||-||-|
|Peter's Minnesota Taxable Income||850,000||250,000|
|Peter's Minnesota Tax Rate (assume 9.85%)||9.85%||9.85%|
|Peter's Minnesota Tax||83,725||24,625|
|Peter's 2018 Tax Refund due to tax law change||(59,100)|
|Peter's 2019 Tax Owed due to tax law change ($120,000 x 9.85%)||11,820|
|Peter's net refund due to law change||(47,280)|
Peter would be due a net refund of $47,280 because of the law change.
Over the last two years, taxpayers have not been able to use either Section 179 or 100% bonus depreciation (assuming less than $1,000,000 of assets purchased) for Federal tax purposes and get a corresponding Minnesota deduction. This is because Minnesota has required 80% of both Section 179 and bonus depreciation to be added back on the Minnesota return. With this new law change, taxpayers may want to consider utilizing Section 179 expensing instead of bonus depreciation, since this will not require an 80% addback on their Minnesota tax return.
How we can help
Minnesota’s approach to conformity is confusing and has resulted in larger than normal tax bills for trucking companies over the past few years. CLA can help work with you to identify whether the retroactive component of the new Minnesota law would apply to you and permit you to get some cash put back in your pocket where you can utilize it.
CLA’s trucking and transportation professionals can work with you to assess your current structure and any future business transactions and can help you understand the impact of the new tax law on your business and your family.
Whether you need just a short consultation or full support throughout the process, we’re here to help.