An Example Of A Company With Cash Flow Problems Top 3 Tax Issues for Truckers

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Top 3 Tax Issues for Truckers

Every tax season, thousands of truck drivers leave millions of dollars in tax deductions on the table. This is mainly due to inadequate planning and poor accounting. Additionally, many tax professionals do a poor job of properly informing truckers of the various 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 are depreciation, per diems, and cash vs. Accrual basis accounting includes.

Depreciation

Generally, buying or renting a tractor and trailer requires a huge upfront investment. Often, owner/operator start-ups find financing comfort due to lease terms of up to five years which really help control overhead and cash flow. The problem is that according to the Internal Revenue Code (IRC), you only have three years for tractors and trailers. In other words, you can claim depreciation only for three years on a tractor and five years on a trailer. As a result, many owner operators pay on equipment after tax deductions for depreciation are exhausted. Another challenge is how the Internal Revenue Service (IRS) calculates depreciation figures. 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 your overall tax liability will increase significantly in the third year of your ownership of the device. 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 didn’t plan for and can’t pay.

Cash Vs. Deposit base

Did you know that the IRS has special rules that allow trucking companies to be on a cash basis when other businesses require accruals? The difference between cash basis and accrual basis is that in cash basis, taxes must be prepared based on the money received and spent in a given tax year. You must file your taxes based on the money earned (whether you received it or not) and the expenses incurred (whether you actually paid it or not). It is beneficial, to say the least, for trucking companies to be on a cash basis, as most trucking company’s receivables exceed their liabilities. Let’s look at a scenario. Generally, customers pay trucking companies for thirty or more days, but if you have employees, you’ll pay them weekly. So in effect, you’re paying yourself faster than you’re getting paid. If you are on accrual basis, you do not avail the special rules mentioned above.

per day

Most of you already know that if you work away from home you may be eligible for deductions related to meal and entertainment expenses. Generally, the deduction is taken in one of two ways. One way is to keep all of your receipts for dining and entertainment expenses incurred throughout the year. Another way is to use the per day method. Per diem rates are set by fiscal year, effective from October 1 each year. These rates vary based on zip code ($89.00 was standard for 2015-16) The IRS allows you to deduct a certain amount each day without having to keep receipts. However, it would be wise to keep your receipts anyway if you want to prove that you were actually on the road during the inspection period. While most taxpayers can only deduct 50% of these expenses, truck drivers subject to DOT hours of service regulations can deduct 80%. Please note that situations are different. For example, if your company pays drivers per diem, the driver may not deduct per diem either.

In this case only the company will be eligible for deduction. Additionally, as a result of each day’s deduction, your deductible may be limited. The per diem deduction is most favorable when using an owner operator who can deduct these expenses on Schedule C against their income.

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