Transportation Profit Down, Tax Liability Up?
We keep hearing the economy is down, worries of a recession, high inflation, etc. This post isn’t about that. Challenges face the transportation industry after many companies had successive great years. You might be reviewing your financials this year and see a smaller number on the bottom line. Now that we are nearing the end of the third quarter, it’s a good time to start thinking about taxes. A smaller profit may mean less tax to pay but there’s several factors to consider when you compare book income to taxable income. I’m going to list just a few that may cause a big difference and create taxable income for your business in 2023 and beyond.
Bonus depreciation for assets placed in service in 2023 is 80%, down from the 100% we’ve all grown accustomed to since the later part of 2017. Take for example a business that buys $6 million worth of trucks and trailers in 2023. Section 179 isn’t an option due to phase out limits. $1.2 million cannot be written off in 2023 with bonus and instead must be written off over the equipment’s modified accelerated cost recovery system’s (MACRS) recovery period. Bonus depreciation is scheduled to continue to phase out by 20% each year through 2027. Also consider that many states don’t conform to bonus depreciation.
The Consolidated Appropriations Act of 2021 allowed for 100% deductibility of business meals provided by a restaurant. This benefit extended to the special per diem for transportation companies. For 2023, the deductible amount of the special per diem reverts back to 80%. For example, a company that incurred $2 million of per diem expense can now only deduct $1.6 million and $400,000 would be non-deductible.
For companies engaged in research and development (R&D) projects, many of these expenses fall under Section 174 of the Internal Revenue Code (IRC) and beginning in 2022, generally need to be amortized over 5 years for tax purposes. For a company spending significant dollars on R&D projects that they expense on their books, this addback for tax purposes can create unanticipated taxable income.
As you can see, a small book profit doesn’t necessarily translate into a small amount of taxable income. It’s important to consider your book and tax difference as well as changes in tax law as you plan for year-end. Now is a great time to start planning with a CLA tax professional.
Nathan is a CPA and has more than ten years of experience providing tax planning, consulting and compliance services to a number of privately held businesses and individuals in a variety of industries, with a special focus on the transportation and logistics industry. He actively communicates with clients and seeks ways to align their individual and business goals with available tax strategies to allow them to make well-informed decisions.
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