Every tax season, thousands of truck drivers leave hundreds of thousands of dollars in tax deductions on the table. This is largely due to inadequate planning and poor accounting. Additionally, many tax professionals do a poor job of properly informing truckers of the different tax exemptions available to them. Truck drivers have access to many different tax deductions and credits; however, the top three areas that cause tax liabilities to occur include depreciation, per diem, and cash vs. accrual.
Depreciation
Generally, a huge initial investment is required to buy or lease tractors and trailers. Often times, owner / operator start-ups find comfort in financing due to lease terms of up to five years, which really helps control overhead and cash flow. The problem is that according to the Internal Revenue Code (IRC) regarding depreciation, you only have three years for tractors and trailers. In other words, you can only claim depreciation for three years on tractors and five years on trailers. As a result, many owner operators end up paying for equipment long after depreciation tax deductions have been exhausted. Another challenge is how the Internal Revenue Service (IRS) calculates depreciation. For example, if you buy a $ 50,000 tractor, it is possible to write off $ 16,665 the first year, $ 22,225 the second year, $ 7,405 the third year, and only $ 3,705 the last year. This means that your overall tax liability will increase significantly the third year that you own the equipment. Tax professionals often fail to inform owner / operators that their potential tax liability will increase dramatically in the third year. This leaves many with huge tax obligations that they did not plan and cannot pay.
Cash vs. Accumulation base
Did you know that the IRS has special rules that allow trucking companies to operate cash when other companies are required to accumulate? The difference between cash and accrual basis is that the cash basis requires that taxes be prepared based on money received and spent during a given tax year. The accrual basis requires your taxes to be reported based on money earned (received or not) and expenses incurred (whether or not you paid them). It is advantageous, to say the least, for trucking companies to operate in cash because most of a trucking company’s receivables outweigh its liabilities. Let’s look at a scenario. Customers generally pay trucking companies thirty or more days in advance, but if you have employees, you will most likely pay them weekly. So, in effect, you are paying expenses faster than you are paying yourself. If it is based on accruals, you are not taking advantage of the special rules available mentioned above.
Per day
Most of you already know that you work outside the home and may be eligible for deductions related to food and entertainment expenses. Generally, deductions are taken in two ways. One way is to keep up-to-date with all your receipts for meals and entertainment expenses incurred during the year. The other way is to use the per diem method. Rates per day are established by fiscal year, beginning October 1 of each year. These rates vary by zip code ($ 89.00 was standard for 2015-16). The IRS allows a certain amount to be deducted per day without you having to keep up with receipts. However, it would be wise to save your receipts anyway in case you have to prove that you were actually on the road during the time period under review. Most taxpayers can only deduct 50% of these expenses, while truck drivers subject to the DOT Hours of Service Rules could deduct 80%. Please note that situations vary. For example, if your company pays drivers a per diem, the driver cannot deduct the per diem as well.
Only the business would be eligible for the deduction in this case. Also, as a result of the deduction per day, your itemized deductions may be limited. The deduction per day is most favorable when used by owner operators who can deduct these expenses on Schedule C from their income.