The trucking industry is currently facing an eerie three-word conundrum that plagues the rest of the nation: the fiscal cliff.
What is the Fiscal Cliff?
The fiscal cliff describes the dilemma facing the U.S. government when the terms of the Budget Control Act of 2011 are implemented. Among the most serious provisions are the expiration of certain tax cuts affecting businesses, changes in minimum tax rates, and the end of tax cuts put into place during the Bush administration. In addition, close to a thousand government programs may be facing additional reductions.
How Does the Fiscal Cliff Affect the Trucking Industry?
The fiscal cliff raises questions about federal tax rates that affect acquisitions and sales within the trucking industry by December 31st. With a number of sellers eager to complete deals by the new year, many owners are worried that business may spill into 2013—and face higher tax rates.
Fiscal tax provisions facing the industry may include increased capital gains taxes by 5%, from 15% to 20%, raised individual income tax rates and a new 3.8% Medicare tax. The trucking industry is particularly vulnerable to the impending changes as many businesses are limited liability corporations— where tax liability falls directly on the owner.
According to an interview in Transport Topics with Gordon Batts of Transport Capital Partners, “An LLC is typically paying 35% taxes on profits. Those rates are likely to go to 43%. A trucking company making $10 million profit is going to have to pay an extra 8%, or $800,000.”
There are possible solutions to the dilemma. Among them:
- Maximizing the total value net of taxes.
- Including any excess capital gains taxes into the terms of a possible deal.
- And finally: there may be a narrow window in 2013 where deals can be made within the current tax rates.
The bottom line? Many trucking companies are awaiting the government's actions this month in order to reach the best business decision.
And honestly, not all is bad. The Organization of Economic Cooperation and Development forecasts that U.S. gross domestic product growth is expected to increase by 2% in 2013, before rising to 2.8% in 2014. While that may be nothing to write home about, it does provide the industry with the promise of eventual growth in the very near future.
We can’t lie: there will be a lot of nervous whistling within the trucking industry during the next few weeks. Let’s hope everyone receives what they wanted from Santa.