truck timesThe Financial Side of the Trucking Industry

Volume 13 | Issue 1 | 2013

Katz, Sapper & Miller, LLPCertified Public Accountants

IN THIS ISSUE

2 263(a) Update: Rules to Impact Truckers

3 How to Use Data to Drive Down Maintenance Costs

4 Can Lane Departure and Other Safety Systems Improve Business?

5 Easing an IFTA and IRP Audit with a Document Retention Policy

8 Here and There in the Trucking Industry

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2 Volume 13 | Issue 1 | 2013

263(a) Update: Rules to Impact Truckers

By Chris Bradburn, CPADirectorcbradburn@ksmcpa.com

The question of when to deduct or capitalize amounts paid to acquire, produce or improve tangible property is frequently a point of disagreement between taxpayers and the IRS. Since 2004 the IRS has been developing guidance intended to reduce controversy related to this question. After issuing and withdrawing proposed regulations under §1.263(a) in 2006 and 2008, the IRS in December 2011 issued yet another round of temporary and proposed regulations, with §1.263(a)-1T providing general rules for capital expenditures, §1.263(a)-2T providing rules for amounts paid for the acquisition or production of tangible property, and §1.263(a)-3T providing rules for amounts paid for the improvement of tangible property. Also affected are guidelines under Regulations §1.162-3

regarding materials and supplies and other regulations indirectly affected by changes to Regulations §1.263(a). These regulations are effective on Jan. 1, 2012 and will expire on Dec. 23, 2014 if not made final.

§1.162-4T of the temporary regulations states that a taxpayer may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized. §1.263(a)-1T provides that no deduction is allowed for (1) any amount paid for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, or (2) any amount paid in

Continued on page 6. See “263(a) Update.”

Author’s Note – This article originally appeared in KSM’s Advisor newsletter (2012 Issue 1). Since that time, the Internal Revenue Service (IRS) has announced changes to the effective date of the temporary regulations pertaining to when to deduct or capitalize amounts paid to acquire, produce or improve tangible property. As originally issued, the effective date of the temporary regulations was Jan. 1, 2012. Throughout 2012 the IRS received feedback regarding the substantial costs being incurred by taxpayers attempting to comply with the new rules. In response, the IRS in November 2012 issued Notice 2012 -73 stating that it planned to amend the effective date of the temporary regulations to Jan. 1, 2014. However, so as not to waste the effort of companies that had already expended substantial resources to comply with the temporary regulations, the IRS plans to allow those companies the option of applying the temporary regulations to periods beginning Jan. 1, 2012. This option will allow companies to apply to the IRS for automatic consent to changes in accounting methods (under rules already established) related to expenditures and policies affected by the new rules.

The IRS has also announced the possibility that certain components of the temporary regulations may be revised or simplified. Those components include: the de minimis rule under Reg. §1.263(a)-2T(g); the treatment of dispositions under Reg. §1.168(i)-1T and Reg. §1.168(i)-8T; and the safe harbor for routine maintenance under Reg. §1.263(a)-3T(g). Many of the potential changes to these items will be directed toward providing relief to small businesses.

Despite the IRS decision to postpone the effective date of the new section 263(a) and section 162 regulations, the expectation is that the rules in their current form (notwithstanding the potential revisions noted above) will be made final effective Jan. 1, 2014. With that in mind, those businesses that acquire, produce or improve tangible property should become familiar with these temporary regulations and prepare to comply with them.

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THE FINANCIAL SIDE OF THE TRUCKING INDUSTRY

How to Use Data to Drive Down Maintenance Costs

The most frequently asked question in a maintenance consulting practice is: “How do my maintenance costs compare to other similar transportation companies?”

Benchmarking maintenance costs can be difficult considering all of the variables that exist within and between transportation companies such as:

• Average age of equipment• Specifications of equipment• Percent of work performed at

company facilities versus outside vendors

• Specifications of tires installed on equipment

• Geographical area where the fleet operates

• Size of workforce and pay levels of mechanics

• Accounting practices for maintenance costs

There are two ways to accomplish benchmarking of costs that provide a reliable comparison for senior leaders to gauge their performance against other transportation companies in the industry.

First, compare against a large database of information. Original equipment manufacturers (OEMs) can provide this information, but it is specific to their type of equipment. KSM Transport Advisors, through its maintenance partner, has access to a proprietary database that contains the specific costs for over 20,000 power units and 60,000 trailer units. With this “density of data” a maintenance cost per mile (CPM) comparison will provide senior leaders a reasonable estimate of the potential maintenance cost performance for their fleet.

Secondly, research shows that the most important attribute to the validity of this comparison is the age of the equipment. OEM brands tend to have the same relative maintenance cost increases year after year. Age in the long run is more important than the make, model, engine, etc. for a competently specified fleet power unit or trailer. It is therefore critical that when comparing costs to any database that the comparison is made using same age band costs for:

• Tractor repairs• Trailer repairs• Tractor tires• Trailer tires

In order to make a valid comparison, information about maintenance costs is essential. Several systems exist to completely manage the maintenance process and cost. One such system is TMT Fleet Maintenance software from TMW Systems, Inc. In the absence of such a system, the company should employ standard accounting practices that allow for segmentation between tractor, trailer and tire costs; these costs can be used along with the fleet breakdown by year to provide accurate benchmarking.

Once the tractor, trailer and tire costs are understood, a strategic plan can be crafted to reduce these costs to approach the benchmark. This plan needs to include specifics about preventive maintenance scheduling, driver comfort prioritization, repair stances, workforce size and pay structure, shop locations, inside/outside, allocations, etc. Like any good plan, data drives the plan and thereby the results.

Benchmarking maintenance costs can be difficult considering all of the variables that exist within and between transportation companies.

By David RoushPresidentKSM Transport Advisors, LLCdroush@ksmta.com

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4 Volume 13 | Issue 1 | 2013

Can Lane Departure and Other Safety Systems Improve Business?

For the past decade, passenger vehicles have been utilizing technology improvements in safety systems such as collision warning, lane departure warning and blind spot cameras. Recently these types of systems have also become available to commercial trucks and the benefits are worth considering.

The U.S. Department of Transportation released a Large Truck Crash Causation Study and found that a full 10 percent of accidents involving these vehicles are due to distracted drivers. These new safety systems directly target distracted drivers and can be a boost to a company’s safety record and bottom line. Considering all the costs associated with crashes such as driver time missed, repairs, disrupted loads, increased insurance premiums and legal costs, even a minor accident can quickly become expensive. A company running a 3 percent profit margin will need $833,000 in additional revenue to cover the cost of a $25,000 accident. As the

costs of an accident increase, it becomes clearer that any measures that can be taken to avoid these costs are worth investigating.

These systems can be retro-fitted onto existing fleets or installed on new purchases. They range in cost from $1,000 to $10,000 per vehicle depending on the manufacturer and system. Initial analysis of these systems has been promising both from tractor manufacturers and independent researchers. Volvo found that 80 percent of carriers who installed these systems on their trucks plan to purchase them on all future fleet upgrades. The Federal Motor Carrier Safety Administration performed a study that found a minimum cost-benefit ratio of $1.33 benefit for every $1 in cost on these systems. Examining the financial benefits of these systems as part of any safety strategy in the future is advised. There could also be an additional benefit from proposed tax credits.

Congress has taken interest in these systems as improvements to highway safety are pursued through legislation. In 2011, the Commercial Motor Vehicle Advanced Safety Technology Act was written to specifically include tax incentives to carriers who installed these systems (tax credit of up to $3,500 per vehicle). While that particular piece of legislation was not enacted, the ideas included in it are still being considered by several members of Congress and could provide additional benefits to those who pursue this technology for their fleets.

By Ben Lyon, CPAManagerbylon@ksmcpa.com

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THE FINANCIAL SIDE OF THE TRUCKING INDUSTRY

Easing an IFTA and IRP Audit with a Document Retention Policy

The trucking industry is experiencing an increase in International Fuel Tax Agreement (IFTA) and International Registration Plan (IRP) audits. Companies can reduce both the financial and personal burden during these audits by adopting a retention plan for supporting documents. In the last newsletter (Truck Times, 2012 Issue 2), an extensive list of record retention periods was outlined, including IFTA and IRP. In this article, the focus is specifically on the adoption of a retention policy for these filings. Companies should be prepared for the number one hindrance during an audit: the production of supporting documents under audit.

At its most basic level, a successful IFTA/IRP retention policy maintains all supporting records and Trip Sheets for their respective filings. IFTA requires that all supporting information used in the preparation of the fuel tax returns (miles and fuel purchases) be retained for four years from the filing date of the return. IRP requires that all supporting information used in the preparation of the annual renewal (mileage records) be retained for three years after the close of the registration year. For both filings, the carrier and driver are responsible for maintaining vehicle trip reports that record, by state or province every mile driven and every gallon of fuel put into the licensed power unit.

In addition, the goal of the document retention policy should strive to keep all

supporting documentation organized. This can be achieved by converting all supporting documents into a digitized form (scan all paper documents and save all digital documents). This leads to two examples where documentation is imperative in order to receive “Tax Paid Gallons” on all fuel purchased.

First, all paper Trip Sheets should be scanned and saved into a digital archive. Second, all fuel receipts, digital or paper, must be maintained. Failure to retain these receipts can lead to an audited ITFA filing with amounts due. The primary reason the audited IFTA filing has an amount due is because when records are missing, the auditor can use an outdated statutory Average Miles Per Gallon (AMPG) of 4.0. This artificially low AMPG causes the number of Taxable Gallons to increase.

A few specific notes and suggestions regarding implementation of a retention policy: Katz, Sapper & Miller’s affiliate, KSM Consulting, can assist trucking companies in creating digital document archives for Trip Sheets. Companies should consider investing in global positioning systems, if applicable, as this has proven invaluable in terms of specific data and document retention. Along those same lines and in support of better fuel receipt retention, using third party fuel vendor reports like Comdata, Wright Express or Fleet One are excellent resources. As with anything, a policy is only as good as its enforcement.

By William M. Graff, JD, LL.Mwgraff@ksmcpa.com

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6 Volume 13 | Issue 1 | 2013

263(a) Update (continued from page 2)

restoring property or in making good the exhaustion thereof for which an allowance is or has been made. The ongoing dilemma for taxpayers has been the application of these rules to business activity. What constitutes an “incidental” repair? What is “maintenance”? How does one discern when an asset has increased in value or had its useful life extended?

The temporary regulations generally divide asset types into (1) buildings and structural components thereof, and (2) assets other than buildings and structural components thereof (i.e., everything else). The temporary regulations further categorize expenditures into (1) amounts paid to produce or acquire tangible property and (2) amounts paid to improve tangible property. Underlying any analysis of whether to deduct or capitalize an expenditure is the concept of the “unit of property” (UOP).

In the case of property other than buildings, the UOP for real and personal property includes all functionally interdependent components of the property. Components are functionally interdependent if placing one component in service depends upon placing the other component in service. For example, a tractor trailer in its entirety (inclusive of all components such as the motor, the cab, the transmission, the tires, etc.) is the unit of property. In the case of buildings, the UOP concept is clarified and expanded to separately consider important functional systems of a building. Under the new regulations, the building UOP consists of (1) the building and structural components; (2) heating, ventilation and air conditioning systems; (3) plumbing systems; (4) electrical systems; (5) all escalators; (6) all elevators; (7) fire protection and alarm systems; (8) security systems; (9) gas distribution system, and; (10) any other system defined

in published guidance. This is a significant change compared to previously issued proposed regulations, given that under prior guidance taxpayers treated the entire building, inclusive of the now separately identified systems, as a single unit of property. For example, under prior guidance an expenditure related to heating, ventilation, and air conditioning (HVAC) systems may have been assigned a short depreciation life based on the analysis that the UOP, the building, was not improved. Now, the analysis must look at only the HVAC system as the UOP, in which case the position for deducting or capitalizing the expenditure may change.

Temporary regulations under §1.263(a)-2T regarding the acquisition or production of property retain most generally understood rules regarding capitalization of expenditures. Expenditures directly or indirectly incurred that result in the production or acquisition of a unit of property must be capitalized. Amounts paid to move and reinstall a unit of property already placed in service by the taxpayer are generally not amounts paid to acquire or produce a unit of property. All work performed on a unit of property prior to the date placed in service is required to be capitalized. In general, all expenditures that facilitate the acquisition or production of real or personal property, such as permitting or title searches, must be capitalized.

The temporary regulations continue to provide a de minimis rule regarding the amounts paid to acquire or produce tangible property (e.g., deducting amounts paid under $500). However, the general rule prohibiting a distortion of income is replaced with a bright-line ceiling rule. Taxpayers may not deduct otherwise capital expenditures in excess of the lesser of 0.1 percent of the taxpayer’s gross receipts for the tax year, or 2 percent of the taxpayer’s total depreciation

Continued on page 7.

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263(a) Update (continued from page 6)

and amortization for the tax year. Additionally, taxpayers are eligible to use a de minimis rule only if they have an “applicable financial statement” (i.e., an audited financial statement).

Acquired materials and supplies are discussed under the proposed regulations. Materials and supplies that are incidental (for which no inventories or records of consumption are maintained) are deductible in the year purchased. Materials and supplies that are non-incidental are not deductible until the year in which they are used or consumed. In general, materials and supplies include property acquired to maintain, repair, or improve a unit of tangible property owned, leased or serviced by the taxpayer and that are not acquired as part of any single unit of property. Examples might include air filters for use in a building’s HVAC system, or brake pads for use on a tractor trailer. The proposed regulations add descriptions of material and supplies to include fuel, lubricants, water and similar items reasonably expected to be consumed in 12 months or less, beginning when used in the taxpayer’s operations.

Temporary regulations under §1.263(a)-3T address amounts paid to improve tangible property. In general, amounts paid related to a unit of property already in service that (1) result in a betterment to the UOP; (2) restores the UOP; or (3) adapts the UOP to a new or different use must be capitalized. The application of these standards to amounts paid will likely remain a source of contention between taxpayers and the IRS, but the proposed regulations provide numerous examples of typical transactions and their treatment under the new rules. Of particular note are changes to regulations that specifically allow the disposition of structural components of a building or building

systems. This will allow the adjusted basis of the retired component (e.g., an old roof) to be recovered when replaced.

The temporary regulations will dispense of the plan of rehabilitation doctrine, which required that otherwise deductible repairs or maintenance be capitalized if performed in conjunction with a larger remodeling or construction project. Retailers and other taxpayers whose buildings or other physical premises are subject to periodic refreshing are given guidance, via examples, on when such costs may be deducted. Taxpayers will still lack bright-line tests that provide clear guidance in such circumstances, so the facts and circumstances of each project must be analyzed. Any expenditure incurred to improve a material condition or defect in property that existed prior to acquisition, or which arose during production, must be capitalized regardless of whether the taxpayer was aware of the problem.

The temporary regulations provide a routine maintenance safe harbor for tangible property other than buildings or building systems. Routine maintenance is a recurring activity and expenditure related to a UOP that a taxpayer expects to perform as a result of the taxpayer’s use of the property. The activity must keep (rather than put) the UOP in its ordinarily efficient operating condition. An activity is considered routine only if the taxpayer reasonably expects to perform the activities more than once during the class life of the UOP.

The proposed regulations under §1.263(a) are far reaching and the discussion above serves to touch on many, but not all, key points that taxpayers should understand when determining whether to capitalize or deduct an expenditure. Taxpayers determining whether to deduct or capitalize expenditures should refer to these proposed regulations, the examples provided, and their KSM advisor.

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Here and There in the Trucking Industry

Learn more about Katz, Sapper & Miller’s affiliate companies:KSM Charitable Foundation Servicesksmcfs.com

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Katz, Sapper & Miller held a Trucking Owners Business Roundtable on Nov. 5, 2012. The roundtable is part of an ongoing series co-sponsored by Katz, Sapper & Miller, KSM Transport Advisors, and Scopelitis, Garvin, Light, Hanson & Feary. The roundtable featured Gordon Klemp of The National Transportation Institute, who shared his most recent driver pay and availability surveys. Additionally, Mark Flinchum and Troy Hogan of KSM’s Transportation Services Group presented on year-end tax opportunities and provided a per diem allowance overview. Our next roundtable will be held on Feb. 6, 2013. For more information or to register, contact Chris Djonlich at cdjonlich@ksmcpa.com.

Congratulations to David Roush, who was recently promoted to president of KSM Transport Advisors.

Tim Almack presented “Problem Solving to Profitability” at the 81st Annual Indiana Motor Truck Association Convention in Austin, TX in September 2012.

Andy Belser and Jason Miller attended the Iowa Motor Truck Association’s Annual Management Conference in Des Moines, IA in September 2012.

Mark Flinchum, Chris Felger, Troy Hogan and Ben Lyon attended the American Trucking Associations’ Management Conference and Exhibition Convention in Las Vegas, NV in October 2012. In addition, Mark and Chris attended the Ohio Trucking Association’s Annual Convention in Cincinnati, OH in September 2012.

Mark Flinchum and Shaun Tipton attended the Missouri Trucking Association’s Annual Conference in St. Louis, MO in September 2012.

David Roush and Jason Miller attended the TransForum User Conference in Orlando, FL in September 2012.

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.

© 2013 KSM Business Services, Inc.

KSM’s Committment to the Trucking Industry:• Alabama Trucking Association• American Trucking Associations• Illinois Trucking Association• Indiana Motor Truck Association• Intermodal Association of Chicago• Iowa Motor Truck Association• Kentucky Motor Transport Association• Michigan Trucking Association• Mid-West Truckers Association• Missouri Trucking Association• National Tank Truck Carriers• New York State Motor Truck Association• Ohio Trucking Association• Pennsylvania Motor Truck Association• Tennessee Trucking Association• Truckload Carriers Association

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

For more information about Katz, Sapper & Miller, please visit ksmcpa.com.

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