Every tax season, thousands of truck drivers overlook tax deductions worth hundreds of thousands of dollars. This is largely the result of inadequate planning and messy bookkeeping. Additionally, a lot of tax professionals fall short in properly educating truckers about the numerous tax breaks that are accessible to them. Although truck drivers have access to a wide range of tax credits and deductions, the three main factors that result in tax liabilities are depreciation, per diem, and cash vs. accrual basis accounting.
Tractors and trailers can be bought or leased, but doing so typically requires a sizable upfront investment. Due to lease terms of up to five years, which significantly aid in controlling overhead and cash flow, owner/operator start-ups frequently find comfort in financing. The issue is that you only have three years to depreciate tractors and trailers under Internal Revenue Code (IRC) regulations. In other words, you can only deduct the cost of tractors for three years and trailers for five years. As a result, a lot of owner operators find themselves still paying for equipment years after their tax deductions for depreciation have run out. The Internal Revenue Service’s (IRS) method for calculating depreciation presents another difficulty. For instance, if you spend $50,000 on a tractor, you can deduct $16,665 in the first year, $22,225 in the second, $7,405 in the third, and just $3,705 in the fourth. The third year that you own the equipment, then, will see a significant increase in your overall tax obligation. Tax experts frequently overlook the fact that owner/operators’ potential tax liability could skyrocket in the third year. Many are left with sizable tax liabilities that they weren’t prepared for and can’t afford to pay as a result.
Cash vs. Accrual Basis
You may not be aware that the IRS has specific regulations that permit trucking companies to operate on a cash basis when other companies would be required to use an accrual basis. Cash basis and accrual basis differ in that taxes must be prepared based on the money received and spent during a specific tax year. According to the accrual basis of accounting, you must file your taxes based on all income received (whether you actually received it or not) and all expenses incurred (whether you actually paid them or not). The fact that a trucking company’s receivables typically outweigh its liabilities makes it advantageous, to put it mildly, for them to operate on a cash basis. Let’s examine a hypothetical situation. Customers typically pay trucking companies thirty days or more in advance, but if you have employees, you probably pay them weekly. In essence, you are paying expenses before you are paid yourself. If you use an accrual basis, you are not benefiting from the available special rules mentioned above.
Most of you are already aware that if you work away from home, you may be able to deduct certain expenses like entertainment and meals. There are typically two ways to take deductions. One way is to keep track of all the receipts you receive for food and entertainment purchases made throughout the year. Utilizing the per diem method is the alternate method. The fiscal year at which per diem rates are set is October 1 of each year. The IRS permits a certain amount to be withheld each day without you having to keep track of receipts up to a certain amount per day, which varies depending on zip code ($89.00 was the standard for 2015–16). However, it would be a good idea to keep your receipts just in case you need to show that you were traveling during the period under investigation. The majority of taxpayers are only permitted to deduct 50% of these costs, whereas truckers who are subject to DOT Hour of Service Rules may deduct 80%. Please keep in mind that every situation is different. For instance, if your business pays drivers a per diem, the driver is not permitted to deduct the per diem as well.
In this situation, the deduction would only be available to the company. Additionally, the per diem deduction may limit your ability to claim certain itemized deductions. Owner operators can use the per diem deduction most advantageously because they can offset these costs against their income on schedule C.