Part 1 covered vehicle qualification for sales tax exemption using a transportation company.
Next, we will discuss how to establish a transportation company and what’s required on an ongoing basis to operate a transportation company.
Start by enlisting the services of a qualified CPA and lawyer that have experience with this type of transaction. They can help guide you on how to register with the appropriate authorities, apply for the specific licenses, determining the proper corporate structure, and guide you on the accounting system set up. The law firm can help set up operating agreements for the new corporate entity, and follow the laws as it pertains to tax returns, bank accounts, and roll-up entities.
Structuring Your Transportation Company
It is vital to create a separate corporate entity for your transportation company to benefit from tax savings. Typically, the separate transportation company is set up as a limited liability company (LLC). The operating company owns the majority of the LLC.
In most states, the transportation company cannot be a wholly owned subsidiary of the company that operates it. Instead, it needs to be a completely separate entity that files its own federal and state income tax returns. Most states require 1% or more to be owned by another party.
Transfer Vehicles from Parent to the Transportation Company
All qualifying vehicles whether leased or owned should be transferred from the operating company into the transportation company. If the vehicles are leased, this involves amending the lease agreement to change the name of the lessee and re-registering the vehicles with the DMV. A fleet management company can help to facilitate this process.
Intercompany operating agreements need to be put in place between the parent or operating company and the transportation company. These agreements could include the following:
Services to be provided by Transportation Company to Parent
- Transportation Services Agreement
Services to be provided by Parent Company to Transportation Company
- Management Services Agreement
- Employee Leasing Agreement
- Operating Agreement
- Creating Your Own Set of Books
The transportation company must establish and operate an entirely separate set of books. The transportation company will issue invoices (ex. monthly) for services to the parent company and vice versa. Services from the transportation company to the parent company include transportation services. The parent company will bill the transportation company for management fees and for the use of its employees. These invoices are paid just like you would do for any other vendor.
The transportation company should have a separate checking account in its name and file its own tax returns. Other expenses that flow through the transportation company include new trucks, truck lease payments, truck repairs and the associated third-party costs. These expenses qualify for sales tax exemption.
The new company will require insurance policies in the transportation company’s name to cover the vehicles. Additionally, cross-corporate guarantees will be required by banks on any financing of the vehicles, as the newly created transportation company has no credit history.
Establishing a transportation company can be time-consuming and must meet the guidelines under the various State tax codes. Typically, sales tax savings will cover the cost of setting up the transportation company within twelve months. Hire a qualified tax advisor who has experience with these transactions. It will save you time and money in the long run and help you sleep at night.
*Disclaimer – Doering does not offer tax or legal advice and is not a CPA firm or law firm. Please consult your tax advisor or contact Doering for a referral to a tax advisor that specializes in transportation company tax accounting.