Is setting up a separate transportation company right for you?

December 22, 2015|Joseph Schirger, Jr.

If you transport your own goods, either in trucks that you own or lease, it may make sense to set up a separate transportation company. Keep these business and tax implications in mind when determining whether to move forward with structuring a new entity.

Consider the benefits

Sales and income tax savings

If you’re a common carrier in Wisconsin, you do not pay sales tax on the purchase or lease of a tractor, trailer or straight truck. In addition to the purchase, any repairs are also exempt from sales tax. For many manufacturers, this is often the primary driver for establishing a separate transportation company.

Separate stream of income

Once you establish your transportation company and are hauling the goods that you manufacture, it may make sense to develop an additional revenue stream by providing transportation and logistics services to third-party customers. For example, if you are already hauling your goods to Texas, look to set up a back-haul of goods from another business on the return trip to Wisconsin.

Legal liability protection

If your new entity is structured appropriately and there’s an accident with one of your trucks, you can limit your legal liability to the transportation company—protecting the assets of the manufacturing entity.

Multistate income tax implications

When operating vehicles in other states, you may be required to file income tax returns for the states through which you’ve traveled and those states in which you pick up or make a delivery. Keep in mind that only the profit of the transportation company will be apportioned between the states that the transportation company is operating.

Be aware of these road blocks

  1. Attorney fees. Paying an attorney to draw up agreements when setting up a new legal entity, agreements and more.
  2. Respect the structure that is established. Cash payments must be made back and forth to the transportation company—not just in journal entries—the same as you would when paying a third party. Not respecting the legal structure may result in the transportation company being disregarded for business and tax reasons.
  3. Increased compliance costs. Creating a more complex structure creates additional bookkeeping and organizational headaches. When maintaining another legal entity you must also file additional tax returns.
  4. Cash flow concerns. The transportation company will need to show a reasonable profit and depending how well the operational company is doing, you may need to consider what to do when some of your cash is tied up in the trucking company. Can you afford a separate transportation company at this point? Do you need to lend money back?

Prepare now for a smooth process

Planning ahead is key. Don’t wait until you have 50 trucks in your operating company before setting up a transportation company. Discuss the possibilities now even if you’re not ready to make the move, then revisit the idea every couple years so you’re prepared when it’s time to make the leap.

The team at Schenck can recommend structuring options for the new entity, as well as:

  • Provide lease values for trucks based on their age and type
  • Prepare tax returns
  • Calculate optimum truck rental fees
  • Run profitability models so you can make the best business decisions
  • Determine the cash impact on the operating company

A trucking or transportation company may not be right for all clients. Contact your account director for guidance as you consider your options.

In addition to tax and financial implications, there are numerous details related to managing resources, security and management coordination that should be evaluated before establishing a transportation company. Schenck’s Trucking & Logistics team can help you look at best practices in the industry beyond your tax returns.

Joseph Schirger, Jr., CPA, MT, is a senior manager with Schenck and has nearly 25 years of experience providing tax consulting and tax compliance solutions for businesses and individuals. He has also represented clients before the IRS and various state taxing authorities.