Loads of tax savings are available to trucking and transportation companies and their owners — you just have to know where to find them and how to claim them. It’s nearly impossible to run a business and keep up with the relentless barrage of complex regulations, so get help from tax professionals who know the trucking and transportation industry and all the exemptions, credits, and deductions you can possibly take.
As you work with your team of financial professionals to design your business and personal tax plans, be on the lookout for these savings opportunities.
Fuel tax credits
There’s a lucrative federal tax credit for just about any fuel that is NOT used in the propulsion motor of a registered highway vehicle (defined as “off highway”).
If your company uses non-propulsion motors such as refrigeration units in everyday business, this credit can really add up, and it’s simple to calculate. For every gallon used, you can get back 18.3 cents on gasoline, 24.3 cents on diesel, and 50 cents on propane. Just be sure you understand the qualifying circumstance and exceptions.
Fuel for non-propulsion motors qualifies — with exceptions
Trucking and transportation companies mainly use propulsion motors in their businesses — those that make things go forward and drive, obviously. But look around your business and identify all the special equipment you use, such as auxiliary power units, pumps, augers, and refrigeration units. These are generally run by non-propulsion motors, and their fuel qualifies for the credit, which can take a big chunk out of your tax bill. (If you use a propulsion motor in these types of special equipment by means of power take-off or transfer, you’re out of luck. The credit only applies to non-propulsion motors.)
Caution: If your company uses fuel from the same tank for both propulsion and non-propulsion motors, you must be able to distinguish between the two. If you can’t legitimately quantify the amount of fuel used in all separate non-propulsion motors, you won’t be able to claim the credit.
Also be aware that to claim any credits for propane use, you must be registered with the IRS as a user of alternative fuels.
Fuel credits are retroactive and refundable
If fuel tax credits are news to you and you’ve been missing out until now, you can still claim the credit for previous years. And fuel tax credits are fully refundable, so eligibility shouldn’t be affected even if your company reports taxable losses.
Forms and documentation
Fuel tax credits can be claimed on Form 4136 with your company’s year-end corporate tax return, independent from the corporate tax return, or filed on a quarterly basis with Form 720.
Your records for this credit should support the number of gallons used, the dates the fuel was purchased, the number of gallons used for each purpose, and the names and addresses of suppliers. Keep in mind that in most cases this credit is only beneficial at the federal level. Some states charge sales tax on the gross amount of fuel (based on average price per gallon at the pump), which may offset any benefit from claiming the credit at the state level. Check the regulations in your state.
Work opportunity tax credit (WOTC)
We all know that finding good drivers, dispatchers, and safety directors is a constant challenge for trucking and transportation companies. What you may not realize is that when your company hires people from targeted categories and employs them for at least 120 hours, you maybe be able to claim a valuable work opportunity tax credit (WOTC). WOTC reduces your federal tax liability by up to $9,600 per person hired — and lets you use the credit to offset the alternative minimum tax (AMT).
Qualifying veterans and other hires
The trucking and transportation industry in general has had great success with hiring returning veterans who in many cases already know how to operate vehicles and heavy equipment from their experiences serving our country. These men and women know a thing or two about hard work and doing their job well. WOTC gives you even more incentive to hire them. In addition to veterans, other types of hired individuals qualify for WOTC, including:
- Qualified veterans (discharged from active duty within one year of hire date)
- Unemployed veterans
- Disabled veterans
- Long-term unemployment recipients (at least 27 consecutive weeks)
- Vocational rehabilitation referrals
- Food stamp recipients
- Long-term family assistance recipients
- Qualified felons
- Qualified summer youth
- Supplemental security income recipients
Hiring qualifications include:
- Temporary, seasonal, part-time, and full-time workers who work a minimum of 120 hours in the first 12 months of employment
- New employees who have not worked for the hiring employer at any other time
- Any job type is acceptable (drivers, mechanics, safety, administrative, dispatch, etc.)
Streamline hiring practices to take advantage of WOTC
WOTC offers significant tax savings, but taking full advantage of the credit can be a large task. Your company must identify eligible employees, collect supporting information, submit the required tax forms, and compute the dollar amount of the credit.
Generally, employers have 28 days after an individual begins work to submit the proper paperwork with the designated local agency in order to qualify for the credit. Special relief is available through December 31, 2019. We suggest that your human resource department consult with your tax advisor to streamline your hiring process and capture necessary information as onboarding unfolds. In most cases, your tax profssional should be able to help you by integrating technology solutions into your HR workflow to maximize efficiency.
Net investment income tax (NIIT)
As a successful business owner you also have investments, so individual taxes affect you and your family, too. You should know about and plan for the net investment income tax (NIIT), which is 3.8 percent of the lesser of two amounts:
- Net investment income, or
- The excess of your modified adjusted gross income (MAGI) above $200,000 (single filer) or $250,000 (joint filer)
Modified adjusted gross income (MAGI) is essentially the income you report on page one of Form 1040, increased by any foreign earned income exclusion. If your MAGI exceeds the $200,000 or $250,000 threshold, the excess becomes a limitation on the amount of net investment income exposed to the tax. For example, if you file a joint return with a MAGI of $260,000, the $10,000 excess over the $250,000 threshold is the most that can be exposed to the NIIT, even if actual net investment income exceeds this amount.
Eyes glazing over yet? It gets more complicated and involved from here, so talk to a savvy tax or financial professional. Wrapped up in all of this are both active and passive business activities, self-rental income, allowance of losses, and trusts and estates. Strategies for minimizing NIIT exposure are complex and involved but boil down to this:
For individuals with income at or near the $200,000 single or $250,000 joint threshold for the NIIT, the focus should be on maintaining consistency from year to year to keep from encountering the 3.8 percent tax. Spikes in income from any source (bonuses, retirement account withdrawals, large capital gains, among others) can push up income and trigger the 3.8 percent tax on interest, dividends, rent, and other investment income.
Other tax issues
As you craft and adjust your trucking or transportation company’s comprehensive tax plan, be aware of these matters as well:
Fuel particulate regeneration credits
Diesel particulate filters require periodic self-cleaning (regeneration). Regeneration generally occurs automatically when driving at highway speeds. In certain circumstances, fuel used in the regeneration process may be subject to a tax credit.
Filing 1099s for outside carriers and owner-operators
You’re not required to file 1099s for outside carriers, but you should file them for the owner-operators you have under contract. If you have contracts with outside carriers that could be perceived as an owner-operators working mostly or exclusively with you, you should file 1099s, which helps document these drivers as independent contractors.
Federal excise tax (FET)
Confusion abounds for trucking companies on the taxability of glider kits and the applicability of federal excise tax (FET). The IRS recently reclassified converter dollies and changed their federal excise taxability. FET is complex, confusing, and constantly changing. If glider kits or converter dollies are a regular part of your trucking operations, get professional clarification and guidance.
Depending on the structure of your operations, you may want to consider restructuring and filing under a QSub election. In certain circumstances, this election can simplify the tax reporting process and even allow for some tax planning opportunities. This is a common election for many trucking companies operating as multiple S corporations.
Apportionment and nexus
Specific apportionment rules for trucking and brokerage activities are often overlooked. If your company is not properly following these apportionment rules you may have nexus or reporting requirements in other states or jurisdictions where you are not currently filing. There is no statute of limitations on these taxes, so exposure could result in significant penalties and interest. Many states now offer voluntary disclosure agreements that allow your company to begin filing in the proper states while limiting cost and exposure.
How we can help
Trucking and transportation are challenging businesses, and taxes are complicated and cumbersome. CLA’s trucking practitioners can help you manage your business and personal exposure to taxes and claim all the credits and deductions available to you.