Advantages Of Tax Deduction For Owners

 

The good news is, maybe you are ignorant to the advantage of tax deductions as an owner operator of the trucking business and hence you are paying way more than what you are supposed to be paying as taxes.

Ever felt like your business is at a partial loss with the monster tax bill you received at the end of the year or quarter year? Did it feel like the government is eating into your profits? Did it urge you to think of wicked ways out of paying heavy taxes? Did the tax paying system seem downright unfair? If yes, then probably you aren’t much updated with the benefits of tax deductions in the trucking business.

As an owner operator of the trucking business, your tax procedures and rules are different from that of a normal employee. While employees have their taxes directly deducted from their paycheques, you need to file for your own taxes which include a lot of decision making, based on the current available tax rules and regulations. This may get a little challenging and tedious at the same time.

There are a lot of points to consider before filing for taxes, whether quarterly or yearly, and tax deductions are definitely one of them. So what exactly are these tax deductions? What is the list of factors that come under the term “Tax Deductions” for an owner operator of the trucking business? What is deductible and non-deductible tax?

Deductible Tax

Absolutely everything that comes under business expenses can be deducted while filing for taxes. Here is a detailed list of what you should consider for tax deductions while filing for taxes.

Tax on Depreciating Property

Equipment used for your trucking business that has a depreciating value can be deducted from the taxes you pay. These include property, trucks, trailers, office machinery, etc.

Business Loans, Mortgages and Interest

If you have mortgaged or taken a loan for the business, then you can deduct interest you pay on the loan or mortgaged property from your tax every year.

Medical Expenses

Business related expenses for DOT physical test, drug testing, sleep apnea test, etc. are deductible expenses.

Dependent Deduction

Child and parent support expenses can be deducted. The parent can be an in law or grandparent as well.

Dispatch Fees

Fees paid for a dispatch service is deductible.

Truck Supplies and Accessories

Supplies such as fire extinguishers, chains, atlas, ice scraper, etc. can be used as business related expense and hence is tax deductible.

Start-Up Cost and Investment

Setting up a business requires money in the form of investment which can be considered tax deductible.

Office Expenses

Office supplies like stationary, calculator, furnishing, etc. can be included in this list as well.

Safety Gear

Expenditure on safety gear like metal toe shoes, gloves, helmets etc. are to be claimed.

Uniform and Laundry

Uniform cost and laundry cost on the go is deductible when away for an overnight trip.

Guard Dog

You can deduct your dog expenses while filing for taxes as well, provided the dog is always on the truck as a guard dog while on the go. These expenses include dog food, veterinary bills, etc.

Office at Home

You are eligible for this deduction if you have opened your office in your house itself. You need to use the home office on a regular basis. The home office should be your main place of business. It should be used exclusively for business purpose.

Insurance Premium Costs

Both company as well as personal insurance plan premiums can be added to tax deduction. This stands as a big plus as insurances help you reap benefits later on in life while paying their premiums give you instant benefits on tax.

Retirement Plans

Any retirement plan that you sign up for can be filed for tax deduction. Retirement plans taken for your spouse include too.

License and Permits

Absolutely any fee paid for business purpose can be deducted from tax payment. 50 percent of self-employment tax is supposed to be deducted while filing for taxes, as well.

Travel Allowance and Fuel

The amount you spend while traveling away from your tax base is deductible. These expenses include toll, parking, fuel, registration fees, lodging, etc. You can also add cleaning equipment and material like detergent, etc. for tax deduction.

Truck Lease

Except for the down payment of the vehicle, all lease payment can be filed for tax deductions.

Communication Equipment and Bills

Use of phone for business purpose can be attached to your tax deduction file. The monthly phone bills can be claimed as well. Internet bill and cell phone data plans can also be part of the claim. However, only 50 percent of access fees are permitted for deduction by the IRS.

Repair and Maintenance

Truck or machinery breakdown expenses are deductible. Service and maintenance of the truck or machines at your work place can also be claimed for tax deduction.

Credit Card and ATM Fees

Only the fees for withdrawal of money for business purpose can be claimed for tax deductions.

Gym Membership

A gym membership can be used as a deductible expense only if it is recommended by a doctor in order to treat a medical condition. The membership must be taken only after the diagnosis and issued prescription.

Per Diem Costs

Per Diem expenses are assumed expenses by the IRS. These expenses include food, beverages, travel tips, laundry while on the go, lodging in case of an overnight business related trip, etc. The IRS gives a $60 to $70 allowance per day for which receipts or a log need not be maintained. Owner operators of the trucking business reap the same benefits through the Schedule C form and enjoy deductions on self-employment tax as well as income tax in the bargain. However, the IRS only allows for an 80 percent deduction on these expenses.

To put it in short, absolutely anything from a pencil to a new vehicle can be claimed for tax deductions as long as it is purchased for business purpose. These expenses can be as ordinary but equally necessary to run the business.

Non Deductible Expenses

As the aforementioned are things you can claim for tax deductions, there are also a few things you cannot. Tax deductions come with a set of rules to be followed and a criterion to fit in, in order to be eligible for the deductions. Let us take a look at what cannot be deducted as an owner operator of the trucking business.

Non-Productive Machine Time

If a machine is not in use or is inactive after work hours during which time and productivity is lost, the lost time cannot be claimed for tax deductions.

Fines

Rule breaking fines cannot be deducted. For example if you are fined for over speeding or breaking a signal, you cannot claim it as a deduction.

Less Than 50 percent for Dependent Cost

If you don’t pay for more than 50 percent of a parent support cost, you cannot claim that expense for deduction.

Your Own Clothing (Street Clothing)

Only uniform and safety clothing used for business purpose is deductible. Street clothing does not come under this category and therefore cannot be claimed.

Time Lost in Maintenance and Repair

The time an owner operator loses while repairing his truck in case of a breakdown, cannot be filed for tax deductions.

Deadhead Trips

Income lost due to empty return trips is not deductible.

Importance of a Tax Home

The travel expense claim demands that you travel away from home. It is therefore extremely important to have a tax home in order to determine whether you are traveling away from it or not. The IRS considers your city or surrounding as your tax home. This place could also be the place of dispatch or the place where you are handed assignments and not necessarily be the home of the self-employed driver.

The tax home refers to your city and area in general. It does not mean one specific place. However, if you do not have a place of work, then your residing house could be used as your tax home. In this case, you need to show that you help maintain your place of residence in some manner or the other when you are away from home, in order to have it as your tax home. In case you cannot show the maintenance, you cannot have that as your tax home.

A tax home could also be used as the places at which the travel begun and ended. For this you need to maintain a log book and save receipts to show expenses during the travel.

Maintaining Good Records

One cannot stress harder on the importance of maintaining good records when it comes to filing for taxes, whether yearly or quarterly. As tax deductions are the most ultimate way of reducing tax burdens for a self-employed truck driver, it is all the more important to have records and receipts of your expenses to reap the benefits of tax deduction. Here are a few tips you could follow in order to maintain strong records;

  • Maintain a file, either trip wise or month wise.
  • Use a hard drive or log book to store information. Google drive could be used as a secure option as well.
  • Organize your receipts each week instead of leaving all for the last minute.
  • Use an app for record storage. Applications are handy and very easy to use.

Rules for Owner Operators who Subcontract

An owner operator with more than one truck is likely to hire another driver. This is simply known as subcontracting the services. Every subcontractor you hire should be issued a Form 1099-MISC for payments that amount to $600 or more for that accounting year. The form requires the sub contractor’s name, address, tax ID, and payment amount.

The next step of the owner operator should be filing the IRS Form 1096 with a compilation of all 1099-MISC payments. The IRS Form 1096 should be submitted before the end of January every year to avoid unnecessary fines and penalties.

The Tax Cuts and Jobs Act of 2017 Law

The Tax Cuts and Jobs Act was a law formed in the year 2017 that actually raised concerns regarding the same. However, as per the law, owner operators of the trucking business could still claim their everyday per diem. The law also allows a 20 percent claim on pass through entities which benefit a lot of owner operators especially when it comes to double taxation.

Sole proprietorship, limited liability corporations (LLC), S corporations and partnerships come under pass through entities and it is necessary for the owner operators of such firms to ensure maximum tax benefit and savings while paying their taxes. The new law claims a minimum saving of $2000 for the owner operator of the trucking business. The law aims at guarantying more savings for more earnings.

Under this law, if the driver of the truck is not an individual contractor, he cannot claim his daily per Diem as an employee. The law also plans on removing the health insurance mandate on owner operators in near future.

Fluctuating Tax Rules

Tax rules and regulations are ever changing and hence are likely to fluctuate every year. It is very important for an owner operator of the trucking business to keep himself updated with the changing rules and file for taxes accordingly. Talk to your tax advisor in case of any tax related confusions. Tax advisors prove to be very helpful in eliminating unnecessary errors and gaining attention towards overlooked laws while filing for taxes.

Please not that filing for unnecessary and invalid deductions will lead to IRS audits and inquires. Keep yourself updated with the latest change in tax deduction rules before claiming deductions or ask your tax advisor for help.

Please refer to Everything Owners Need To Know About Tax Deductions, Blog for a better understanding on tax deductions.

Everything Owners Need To Know About Tax Deductions

Remember the time as school kids that we wasted in leisure and play and bit our nails off just one day before our tests hoping we had only prepared a little earlier? Those curses and self-deteriorating comments we passed at ourselves back then for being the procrastinator and knowing we would be much better students had we been more organized, is a synonymous feeling we face while filling for taxes as grownups.

Filing for taxes are definitely not a very fun thing to do as it eats up a whole lot of time and demands a lot of concentration and attention in order to get everything right.

If taxes are the least of your concern, then you probably are on the employee end, having them pre calculated and deducted directly from your monthly paycheque. However, this is unfortunately not the case with the owners of a business and this factor applies to owner operators of the trucking business as well. Hence it is extremely important to study this challenging procedure in detail.

In the trucking business, an owner operator is solely responsible for paying off taxes relevant to his firm, by himself. The owner needs to calculate taxes and see that they are paid to the state and federal agencies before their due date, in order to avoid penalties and fines for the same.

An owner operator is required to pay his taxes quarterly or yearly, quarterly being the more convenient manner. These taxes are supposed to be about 20 to 30 percent of the net income of that quarter or year. If these payments are done at regular intervals, the owner will save himself of a fine at the time of year ending (generally during the month of April). It is important to pay taxes, quarterly, if you owe at least $1,000 in taxes after subtracting withholding and credits. Owners also hold the advantage of tax deductions while running a business. Let us take a look at what tax deductions actually are.

Owner Operator Tax Deductions

As an owner operator of the trucking industry, you have ample of tax deduction benefits. These deduction benefits can be used to keep the money rolling and the cash flow on a constant up rise. These deductions include absolutely everything that comes under your company expenses. Owners are often oblivious to this fact. Most owners do not fully know the factors that come under this rule and the list of things that can be claimed under tax deductions for their company. The tax deduction rule has a lot of benefits when filing for tax returns and it is therefore a vital piece of information relevant to tax filing.

As the tax deduction rule includes all company expenses, it is extremely important that you save or keep a record of all the company expense receipts of the accounting year or quarter year, depending on the tax term you choose. Maintaining a file of these receipts could prove to be handy.

Before we get into the nitty gritty of tax deductions, it is important to first understand the need to pay your taxes on time and take a look at what owner operator tax payments include.

Why is it important to pay your taxes time to time?

This saves money and unnecessary trouble. The government charges a 3 percent interest rate on the tax for late payments. Hence if you don’t pay your taxes on time, it would only be a burden of extra money to pay and additional paperwork to cope with. It would also be considered as a legal offense if you don’t pay your taxes at all, thus taking away a lump sum amount from you at the time of the yearly audit.

Types of Taxes

There are two types of taxes that are applicable to the owner operator of the trucking business. They are:

Self-Employment Tax: Medical taxes and social security taxes rhyme with self-employment taxes. This tax is actually a combination of medical tax (2.9 percent) and social security tax (12.4 percent). Therefore, the self-employment tax amounts to 15.3 percent.

Federal Income Tax and State Income Tax: As an employee’s income tax is deducted from his paycheque, an owner operator on the other hand needs to take responsibility of estimating and paying this tax. The federal income tax and state income tax is generally calculated on the basis of tax return.

Types of Tax Forms

There are two types of tax forms; W2 and 1099. Often, W2 is a tax form issued to company employees. This is an indication that your taxes have already been deducted from your paycheque.

On the other hand, a self-employed individual who is also classified as the owner operator would have to fill in the 1099 form. This is because he would be responsible for filing for his own taxes and paying them off himself.

Schedule C

Schedule C is a form that reports the net income of the firm relevant to the 1099 form. This comprises of all other incomes as well that are incurred through truck driving by the firm.

Tax Facts and Guidelines

  • The IRS permits tax payments on the basis of your previous year records and data.
  • Every state has its own income tax website that should be referred to while paying taxes. Payment vouchers and addresses can be obtained from the state website itself. You could also find payment vouchers and addresses on the IRS.gov. website.
  • You can pay your federal income tax and state income taxes online. For federal income taxes you could visit – eftps.gov. website, whereas for state income tax you could visit your state’s department of revenue website and follow guidelines on the site for the payment.
  • To make the federal income tax and state income tax payment together, you could visit www.officialpayments.com. The website however charges an extra 2 percent of your payment as service fee.
  • It is absolutely fine to pay your taxes on a yearly basis. However, that is more time and energy consuming. Yearly tax paying simply accounts for more paperwork and more data to fetch from. This can add to confusion and hence the quarterly method of paying taxes is proven to be simpler and faster.
  • Set aside money from each pay cheque to avoid unnecessary hassles like money shortage at the time of tax payment.
  • One of the most important factors while filing for tax is record keeping. Keep a proper record of your data, tax documents, paperwork and other necessary documentation at the time of filing for taxes. Maintain a file of documentation for a smoother procedure.

You never want to annoy an IRS official

While most owner operators in the trucking business are used to filing for taxes on their own each year their experience tends to get them a little overconfident about never goofing up. However, with the “almost there” and “just managing somehow” attitude, there is a thick chance that you might just miss out on an important chunk while filing for taxes. No, you are not to blame. It is actually the ever changing tax rules that get you all confused and worked up last minute.

Tax is an elaborate topic with many aspects and loop holes that are invented and scraped every now and then. It is no wonder that owner operators are bound to miss out on a few of the constantly changing rules. Nevertheless, it is no use playing the blame game last minute as it would eventually land you in trouble. It is therefore very important to have yourself updated with the latest change in rules before you file for taxes, be it quarterly or yearly. Maintain a file of documentation would also smooth out regular audits thus avoiding clashes and confusion of any sort.

Understand that the tax deduction procedure is way different than that of an employee’s. This is extremely crucial if you are new to the business as this is one of the most common reasons of error while filing for tax. Here are a few questions that may help clear out some of the confusion.

Commonly Asked Tax Related Questions

Owner operators of the trucking industry are often confused with a lot of aspects related to tax payment. As there is information readily available on their websites, there are still a few questions that may not have clear answers. Given below are a few questions that are commonly asked while paying taxes.

Q. If I have a contract labourer, what are the forms that I would need to fill? (This person could be a team driver per say)

A. in this case you would need to run an employee through the payroll and hand them a W2 form at the end of the year. On the other hand, if you have a contractor labourer, you would have to hand them a 1099- MISC.

Q. What if I have not paid my quarterly taxes this year?

A. If you have crossed the due date then you will be charged a 3 percent fine on the tax amount by the IRS.

Q. Is it necessary to file different tax returns for company driver earnings and owner operator earnings?

A. You don’t have to. If you are the only proprietor in the company then you will need to fill in the 1040 form. This form comprises of a Schedule C that entails all your business expenses and earnings.

Questions Related to Family and Taxes

Q. Is it ok to claim a parent as a dependent on your taxes?

A. There is a provision for this factor by the IRS. However, you need to meet more than half of your parent’s support cost to fit in this criterion. This means, if you cover 51 percent or more of the parent’s support cost, only then you are eligible to file the claim for your parent as a dependent. This person need not only be your parent, he can be a grandparent on in-law as well. The costs you need to cover include food, clothing, shelter, medical services, equipment expenses, etc.

Q. Do spouses need to file their tax returns separately?

A. Now that is a choice you can make. You have two forms to choose from; marriage filing jointly and marriage filing separately. You need to see which one reaps more benefits for you and file for tax payment accordingly.

Q. How much of my or my spouse’s social security income falls under tax payment or is taxable?

A. The social security income tax depends on your marital status as well as your total income. For federal income tax return, your income should be between $25,000 and $34,000 respectively. In this case, your income tax would amount to about 50 percent of your benefits.

In case your income is above $ 34,000, about 85 percent of your benefits fall under the tax payment rule. In case you are married and file in for joint returns, you and your spouse together need to have an income between $32,000 and $44,000.  If it is so, your taxes would amount to about 50 percent of your benefits.

Q. Can a dependent be claimed on quarterly estimated taxes?

A. No. Dependents should only be claimed on yearly tax returns.

Paying taxes is not the sole responsibility of an owner operator of the trucking industry. It is important that he also checks for tax deductions and uses that rule for optimum tax benefits as well. Tax deductions reduce the burden of heavy taxes and also unnecessary taxes that owners often pay due to lack of information. There are also many available deductions that are often overlooked by owners that lead to extra tax payments. An owner operator should be well updated with the tax deduction advantages while filing for taxes so that he can fully avail its benefits and avoid extra loss of money.

Owner operators of the trucking industry have an array of deduction benefits on tax payment. However, there are many aspects such as subcontracting rules, rules for partnerships in business, etc. that need to be taken a close look at before filing for tax deductions.

As part of the trucking industry, you could learn gps and fleet management better with a Matrack gps truck tracking device. Please refer to the Advantages of Tax deduction for owners, blog for detailed information on the same.