Every tax season, thousands of truckers leave millions of dollars in tax deductions on the table. This is largely due to improper planning and poor bookkeeping. Additionally, many tax professionals do a poor job of properly informing truckers about the different tax breaks available to them. Truck drivers have access to many different tax deductions and credits, however the three main areas that cause tax liabilities to occur include depreciation, per diem, and cash vs. the accrual
Depreciation
A large initial investment is usually required to purchase or lease tractors and trailers. Owner/operator start-ups often 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 under the Internal Revenue Code (IRC) regarding depreciation, you only have three years on tractors and trailers. In other words, you can only claim depreciation for three years on tractors and five years for trailers. As a result, many owner-operators end up paying for the equipment long after the 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, you might 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 you own the team. Often, tax professionals fail to inform owner/operators that their potential tax liability will increase dramatically in the third year. This leaves many with huge tax liabilities that they did not plan for and are unable to pay.
Cash vs. Accrual Basis
Did you know that the IRS has special rules that allow trucking companies to work with cash when other companies would be required to do so? The difference between cash and accrual basis is that cash basis requires that taxes be prepared based on money received and spent during a given tax year. The accrual basis requires that your taxes be filed based on the money earned (whether you received it or not) and the expenses incurred (whether you paid them or not). It is advantageous, to say the least, for trucking companies to operate in cash because most of a trucking company’s accounts receivable exceed its liabilities. Let’s see a scenario. Customers generally pay trucking companies thirty or more days in advance, but if you have employees, you’ll most likely pay them weekly. So, in effect, you’re paying for expenses faster than they pay yourself. If it’s accrual based, you’re not taking advantage of the special rules available above.
per day
Most of you already know that you work outside the home and may be eligible for deductions related to dining and entertainment expenses. Generally, deductions are taken in one of two ways. One way is to keep up with all receipts for meals and entertainment expenses incurred throughout the year. The other way is to use the per diem method. Per diem rates are established by fiscal year, beginning October 1 of each year. These fees vary by ZIP code ($89.00 was standard for 2015-16) The IRS allows a certain amount to be deducted per day without having to keep up with receipts. However, it would be wise to keep your receipts anyway in case you need 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 DOT Hours of Service Rules could deduct 80%. Please note that situations vary. For example, if your business pays drivers per diem, then 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 travel expenses deduction, your itemized deductions may be limited. The per diem deduction is more favorable when used by owner operators who can deduct these expenses on Schedule C against their income.