truck timesThe Financial Side of the Trucking Industry

Volume 14 | Issue 1 | 2014

Katz, Sapper & Miller Certified Public Accountants

IN THIS ISSUE

2 Transportation Companies Benefit from New Capitalization Regs

3 Tax Implications of Running Miles between the U.S. and Canada

4 Green Fleets: Trucking Companies Explore Alternative Fuel Equipment Upgrades

6 Client Spotlight: Paschall Truck Lines Forms 100% ESOP

8 Here and There in the Trucking Industry

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Transportation Companies Benefit from New Capitalization RegsDeciding what should be capitalized or expensed can be a painful process, particularly for companies that are fixed asset intensive. The temporary regulations that previously instructed taxpayers concerning capitalization (Regs 1.263(a) and 1.162(a)) were ambiguous, failing to set clear guidance on a variety of issues affecting capitalization. On Sept. 13, 2013, the Internal Revenue Service (IRS) attempted to firm up these guidelines by releasing the final rules concerning when taxpayers must capitalize and when they may deduct expenditures related to acquiring, producing, maintaining, or repairing tangible property. While the new regulations are not required to be followed until Jan. 1, 2014, taxpayers may choose to follow these regulations for tax years beginning Jan. 1, 2012. In some cases, taxpayers may be required to file a change in accounting method to comply with the new rules.

By Randy Hooper, CPADirectorrhooper@ksmcpa.com

The final regulations cover five major topics. See Figure 1.

• Capital expenditures (Reg. 1.263(a)-1)

• Amounts paid for acquisition or production of tangible property (Reg. 1.263(a)-2)

• Amounts paid for improvements to tangible property (Reg. 1.263(a)-3)

• Repairs and maintenance (Reg. 1.162-4)

• Materials and supplies (Reg 1.162-3)

While all of the topics addressed in the new regulations affect the transportation industry, there is one point in particular that could substantially increase deductions for truckers. When deciding what can be properly expensed, taxpayers with an applicable financial statement may now rely on a new de minimis safe harbor amount of $5,000. Applicable financial statements are: independent certified audited financial statements, financials required to be filed with the SEC or financials required to be provided to a federal or state government agency. The de minimis amount for a company without an applicable financial statement is $500. Entities wishing to take advantage of the higher safe harbor amount must file an election with their tax return and have a written internal policy stating their capitalization standards.

Continued on page 7.See “Capitalization”

Capital expenditures (Reg. 1.263(a)-1)

Materials and supplies (Reg 1.162-3)

Repairs and maintenance (Reg. 1.162-4)

Amounts paid for acquisition or production of tangible property (Reg. 1.263(a)-2)

Amounts paid for improvements to tangible property (Reg. 1.263(a)-3)

FIGURE 1

Five Major Topics of Capitalization Regulations

THE FINANCIAL SIDE OF THE TRUCKING INDUSTRY

Katz, Sapper & Miller 3

Tax Implications of Running Miles between the U.S. and CanadaThe U.S. Department of Transportation recently released data showing that trade between the U.S. and Canada is on the rise. Trucking is at the forefront of U.S.-Canada trade as trucks were carrying nearly 54 percent of freight across international borders as reported in October 2013. As more companies evaluate taking on international routes, it is important to understand the tax implications of running miles across international borders.

The income tax treaty between the United States and Canada addresses the tax implications for trucking companies. These treaties established a tax exemption for U.S. and Canadian transportation companies engaged in international hauling. While an exemption exists in

regards to paying federal income tax on international trade, there are still filing requirements that must be satisfied.

For U.S. corporations running miles into Canada, U.S. trucking companies are required to file a Canadian income tax return, Form T2, and complete Schedule 91, Information Concerning Claims for Treaty-Based Exemptions, in order to claim the treaty exemption. The T2 serves as a federal, provincial and territorial income tax return.

Canadian corporations running U.S. miles are required to file Form 1120-F,

Continued on page 7.See “Implications” Implications

Nathan Potter, CPAStaff Accountantnpotter@ksmcpa.com

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Green Fleets: Trucking Companies Explore Alternative Fuel Equipment Upgrades Alternative fueling is one of the hottest topics in the trucking industry today. Evidence could be seen at the sold out Natural Gas in Trucking Summit, hosted by the American Trucking Associations in the fall of 2012. And many state associations continued to demonstrate its growing popularity by including natural gas as a topic at their annual conventions throughout 2013. With diesel hovering around $4 per gallon, private and for-hire fleets are searching for all possible ways to improve fuel efficiency while also reducing truck emissions.

Natural gas, in either liquid (LNG) or compressed (CNG) form, is a popular

By Matt Gard, CPAManagermgard@ksmcpa.com

option many companies are choosing. The price of natural gas has increased since reaching a record low in April 2012 and is currently 30 percent cheaper per gallon than diesel. However, the lower cost of fuel should not be the only deciding factor as these trucks can cost up to $50,000 more than a diesel truck. This is a substantial increase considering new individual tractors already cost more than $110,000.

Many companies are analyzing the impact the increased investment for alternative fuel tractors will have on their cost. For example, see Figure 2.

Increased cost per one alternative fuel vehicle: $40,000

Price per gallon – diesel: $4.00

Price per gallon – natural gas: $2.80 ($4 x 0.7 or 30% less per gallon than diesel)

Average MPG (both diesel & natural gas unit): 6 mpg

FIGURE 2

Analzying the Impact

of Increased Costs

THE FINANCIAL SIDE OF THE TRUCKING INDUSTRY

Katz, Sapper & Miller 55

Based on these assumptions it would take one unit approximately 200,000 total miles to earn back the initial investment. However, this assumption does not factor in fuel surcharge programs implemented by most for-hire carriers to recoup the cost of diesel above a specified base price per gallon. There is currently no federal regulation covering fuel surcharges. A base price per gallon, near $1.25, is common industry practice.

Some companies are already moving forward and are adding natural gas units to their fleets. One private carrier is in the process of converting their entire fleet to CNG by 2015. Based on their analysis, the company is expecting to recoup their initial investment in only 2½ years. Another for-hire fleet worked with

the U.S. Department of Energy to obtain government funding to convert several test units from diesel to CNG.

The assumptions above do not take into consideration any differences in maintenance costs or availability. Truck stops are recognizing the increased demand within the industry and are beginning to make alternative fuels available at more stations around the country. Maintenance costs, in general, may be more of a wild card since this is relatively new technology.

There are many factors to consider and companies should carefully analyze equipment options before determining the best solution.

Determine the amount of fuel consumption, in gallons, needed to earn back the increased investment.

In this equation, it would take approximately 33,000 gallons.

$4.00 – 2.80 = $1.20 lower price per gallon$40,000 / $1.20 = 33,000 gallons consumed

Determine the total number of miles needed.

33,000 (gallons) x 6 (mpg) = 200,000 total miles traveled to recoup initial investment

Step 1

Step 2

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Client Spotlight: Paschall Truck Lines Forms 100% ESOPIn October 2013, Randall A. Waller, president and CEO of Paschall Truck Lines, Inc. (PTL), announced that PTL had sold 100 percent of its stock to its employees through an Employee Stock Ownership Plan (ESOP). Mr. Waller made the announcement to his employees at the Curris Center Ballroom on the Murray State University campus in Murray, KY. Mr. Waller purchased the company from L.W. Paschall approximately 40 years ago. Today, PTL, also headquartered in Murray, operates approximately 1,130 tractors and has approximately 1,400 employees.

“This [ESOP transaction] has solved several problems,” Mr. Waller said, noting that the move helps satisfy an exit plan. Additionally, the ESOP transaction should ensure that the headquarters will remain in Murray. “In talking with other potential buyers, one of the main things they wanted to do was do away with our corporate headquarters,” Mr. Waller said. “That was not an option.”

Katz, Sapper & Miller (KSM) played a significant role in facilitating the ESOP transaction by coordinating the services of the trustee, attorneys and valuation experts. The tax planning provided by KSM helped ensure that Mr. Waller, PTL and the newly-formed ESOP could structure the transaction to the benefit of all stakeholders.

“We really feel that this whole transaction has been a team effort, and that Andy Manchir (a director in KSM’s Valuation and ESOP Services Groups) was vital to the process,” said Charles Wilson, vice president of finance for PTL. “Andy helped us coordinate and prioritize

our responses to the many professionals involved and helped keep everything on schedule. And Andy Belser (a partner in KSM’s Transportation Services Group) contributed an important tax strategy that helped maximize proceeds to the seller. Without KSM’s involvement I don’t think the outcome of this deal would have been nearly as positive for Mr. Waller, the employee owners and the company itself.”

KSM congratulates PTL on its ESOP transaction and wishes the company continued success in 2014 and the years to come.

“Without KSM’s involvement I don’t think the outcome of this deal would have been nearly as positive for Mr. Waller, the employee owners and the company itself.” — Charles Wilson, PTL VP of Finance

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Capitalization(Continued from page 2)

For example, if a transportation company with an applicable financial statement decided to invest $150,000 in GPS units at $1,500 per unit to place on vehicles already in service, they would typically capitalize these units and depreciate them over five years. However, under the new capitalization rules, if the taxpayer is provided an invoice that breaks out each unit on a separate line, and each line is under $5,000, the entire amount may be expensed as an ordinary deduction in the current year. This example would apply beyond GPS units as well. Auxiliary power units, yard equipment, used trailers or any other purchase under $5,000 may be expensed, as long as it meets the stated criteria.

It is important to note that the new de minimis amounts do not change the IRS’ position on expensing tires. Even if a taxpayer is required to have a $500 capitalization policy, tires may still be expensed under Revenue Procedure 2002-27. This Revenue Procedure states that taxpayers must capitalize the cost of original tires on owned equipment, but may deduct the cost of replacement tires on owned equipment when they are installed.

The tax advantages of increasing one’s capitalization threshold may be obvious, but some companies are choosing not to adopt the new safe harbor amount or are setting their capitalization policy lower than $5,000 because of the effect on their financial statements. Expensing these purchases could dramatically shift a company’s financials and could negatively affect loan covenant calculations. Therefore, taxpayers are advised to consult with their tax advisors prior to changing capitalization policy.

(Continued from page 3)

U.S. Income Tax Return of a Foreign Corporation, and claim a treaty exemption by completing Form 8833, Treaty-Based Return Position Disclosure. While all income shall be exempt for U.S. federal purposes, these companies could still be subject to U.S. state tax liabilities if “nexus” is generated. The tax treaties do not exempt Canadian companies from taxation at the U.S. state level. Canadian companies need to look at each state they are traveling through to determine if nexus has been created.

As companies continue hauling across borders or consider taking on international routes, it is important to understand the related tax implications and filing requirements.

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Here and There in the Trucking Industry

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Katz, Sapper & Miller (KSM) held a Trucking Owners Business Roundtable in February. The roundtable was co-sponsored by KSM, KSM Transport Advisors, and the law firm of Scopelitis, Garvin, Light Hanson & Feary. The roundtable featured Thom Albrecht, managing director of BB&T Capital Markets, and Bryan Merolla, senior analyst at the Cleveland Research Company, who discussed their views of the economy and trends in the transportation industry. Additionally, Jason Miller and Don Boezeman of KSM’s Transportation Services Group provided accounting and tax updates; while Nathaniel Saylor and Brandon Wiseman of Scopelitis provided a transportation law update.

KSM Transport Advisors (KSMTA) hosted a Freight Network Roundtable in February. The roundtable provided an opportunity for KSMTA’s freight network clients to learn about and discuss freight network engineering concepts, issues and best practices.

Mark Flinchum presented on the topic of ESOP accounting at the Indiana Chapter of The ESOP Association’s Annual Conference in Carmel, IN in February. He also co-presented with Andy Manchir of KSM’s Valuation and ESOP Services Groups on the topic of “ESOPs as a Business Succession Planning Tool” at a joint presentation with the law firm of Fox Rothschild in New York, NY in February.

Jason Miller presented on the topic of “Profitability Best Practices” at the Indiana Motor Truck Association’s Future Leaders of Indiana conference in Indianapolis, IN in October 2013.

Truck Times Editorial Committee: Mark Flinchum, Tim Almack, Andy Belser, Donna Blackmon, Jennifer Moore

Truck Times is a bi-annual publication distributed to our clients and friends. Any tax advice or opinion herein contained is not intended to be used, and cannot be used, by anyone to avoid the imposition of any federal tax penalties. For more information on the articles featured in this edition of Truck Times, please contact the authors at 317.580.2000.

© 2014 KSM Business Services, Inc.

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