Tax Reform Made Simple: How the Tax Cuts and Jobs Act Will Change the Moving IndustryMarch 14, 2018
2017 was a year of uncertainty. Many wondered how this new Congress, divided on thorny issues such as healthcare and immigration, would deal with tax reform. Would they reach an agreement? Would the changes propel the economy or plunge the U.S. into another deep recession?
Then, on December 22, 2017, the president signed the Tax Cuts and Jobs Act, sealing the bill into law. The dust has settled, and months of speculation have ended.
So, what is in the new tax law? Here, we will dig into this legislation and reveal how it may change the moving industry.
A brief history of tax reform
The income tax did not exist for most of American history. The American Revolution was inspired, in part, due to grievances against taxation. Therefore, collecting federal taxes was considered unconstitutional, and the government received most of its revenue through tariffs.
Early property taxes were implemented to help the U.S. pay for wars. When the Civil War broke out, the first income tax was passed with the Revenue Act of 1861 but was rescinded a decade later. The 16th Amendment, introduced in 1913, cleared the way for the U.S. government to collect income taxes permanently.
Between World War II and the 1960s, the highest tax bracket soared to 90 percent. President Kennedy became the first president to push aggressively for tax cuts. The next major reform came in President Reagan’s plan which offered steep cuts to the tax rates, consolidated brackets and simplified the tax code.
Today’s tax reform presents the first serious overhaul of the U.S. tax code since 1986.
The Tax Cuts and Jobs Act is 1,097 pages, and a lot has changed. The following points are the most significant updates:
- Middle-class families (joint-filers making between $77,401 and $315,000) will see about a 3-4 percent drop in their tax rates.
- Corporate taxes drop from 35 percent to 21 percent.
- The standard deduction (taken by those who do not claim itemized deductions) will nearly double from 6,500 to 12,000 for single filers and from 13,000 to 24,000 for joint filers.
- Additional limitations are being placed on itemized deductions in an effort to simplify the tax code.
The new law lowers taxes for most Americans and frees up capital for businesses. The idea is that this will encourage people and companies to spend more, thus creating more economic activity and growth.
However, the most immediate effect of this tax law is that it ends the period of uncertainty that has hung over the economy since the presidential election. Now businesses can see the playing field and know the new rules of the game, which allows them to adjust, plan and invest with more confidence.
The loss of the moving expense deduction
The Worldwide Employee Relocation Council (ERC) and the American Moving and Storage Association (AMSA) joined forces to lobby Congress for the preservation of the moving expense deduction.
However, since lawmakers were seeking to fundamentally overhaul and simplify the tax code, in part by eliminating long lists of itemized deductions, the moving expense deduction became a casualty of this effort.
The loss of this deduction caused much consternation among moving industry associations that fought hard against its removal. However, as we will show, this news is not all bad.
People who move for work often receive a moving expense reimbursement from their employers. These companies will still be able to deduct their employees’ moving expenses on their corporate taxes, thus shifting most of the burden away from the transferee. However, when the company issues a check to the employee for their moving expenses, this amount is considered taxable income. Therefore, some companies will increase the total reimbursement to compensate for the higher tax liability, sparing their employees from increased costs. This is known as “grossing up,” and we anticipate more large companies will use this tool.
Next to consider are private residential, cash-on-delivery (COD) transferees who are not receiving a reimbursement check for their moves. Historically, any move inside a 50-mile radius has always been ineligible for a deduction, so those people will see no change. However, transferees moving outside a 50-mile radius for work, who once enjoyed this deduction, will now lose the ability to subtract it from their taxable incomes.
It is highly unlikely that the loss of the moving expense deduction will suppress moving activity. The vast majority of people who hire a moving company are relocating because of opportunity. Many are starting a new job, oftentimes one that promises higher pay, and seeking a better quality of life for themselves and their families. People do not make a moving decision simply because they can deduct their moving expenses on their taxes. Therefore, a decline in moves is not expected; rather acceleration is foreseen due to increased economic activity and job growth.
In the corporate relocation market, growth-oriented companies will continue to expand and hire for as long as they see economic opportunity. And as we will explore in the next section, they have plenty of new reasons to do so.
Companies now have more working capital
The new tax law drops corporate taxes from 35 percent to 21 percent, which frees up a great deal of capital for companies to invest in their growth. Some companies have made the headlines recently by giving out bonuses to their employees. However, many companies will use this extra cash to reinvest in their businesses by upgrading and expanding their operations, in addition to making purchases that they had been delaying until the tax legislation became law.
As companies grow, this opens the need for talent wherever they can find it. This means many people will be moving to new cities that have opportunities for jobs and wage growth. The moving industry thrives when the economy is growing.
Arpin agents and owner-operators will see benefits
The majority of Arpin’s moving workforce is made up of smaller, regional moving agents and independent owner-operators collectively known as Arpin’s Agency Family. To work for Arpin Van Lines, the agent or operator must pass a rigorous approval process and maintain high standards of customer service and operations, as well as comply with strict safety standards to keep their status.
Arpin’s Agency Family is expected to benefit from the tax law in particular, due to two recently expanded provisions—Section 179 and bonus depreciation.
Section 179 is a provision, specifically designed for small businesses, that allows them to take a deduction of $1 million worth of new and used equipment purchases. This was recently doubled from the 2017 limit of $500,000. After the first million, they may take 100% bonus depreciation on the remaining balance of their purchases. The deductions may all be taken in the first year the equipment is purchased and put into service.
Therefore, agents and owners who buy new equipment, such as moving trucks, vehicles, computers and software, can deduct twice the value of these purchases that they could in 2017. These accelerated write-offs are expected to encourage Arpin agents and owner-operators to invest in their businesses.
The path forward
Overall, while there will be higher mobility programs costs due to grossing up the household goods reimbursement to the employee, there are many reasons to be optimistic about tax reform. The reduction of corporate tax rates is expected to free up more capital for reinvestment, expansions and jobs. Expansion will mean more talent transfers and new hires.
The loss of the moving tax deduction is certainly unfortunate, particularly for private COD customers who do not have benefit of a corporate moving expense reimbursement. However, it will not suppress moving activity, and the market will adjust to life without it. At the end of the day, most people move for opportunity, not for tax deductions. Companies retain the ability to deduct the costs of employee moves as well as their gross up payments, should they choose to offer them.
Smaller moving companies have reasons to celebrate because they will be able to write off more of their capital expenditures as they upgrade or buy new equipment, in some cases saving hundreds of thousands of dollars.
In terms of the greater economy, large corporations that have sent huge sums of money to other countries for more favorable tax conditions are now bringing their money back to the United States. These billions of extra dollars coming back to the U.S. are expected to stimulate the economy further while adding to the tax revenues.
When the economy does well, so does the moving industry. We look forward to a prosperous future.
Disclaimer: This is for informational purposes only and not to be taken as legal or accounting advice. Every person and business is unique; therefore, please consult a tax expert for advice on your situation.