There are many ways to reduce your tax bill and just as many rules and qualifications. You need a good accountant who understands trucking and your operation, but it helps if you know a little about the tax system.
You can reduce your tax burden in three ways: through income adjustments, deductions and credits. Understanding these methods will help you help your tax preparer lower your tax bill.
If your gross earnings for the year equal $100,000, you don’t pay taxes on that amount. The law provides for certain adjustments, or subtractions, that leave you with an adjusted gross income. This is the first reduction in the amount that is taxed.
Automatic adjustments, subject to some restrictions, include:
- Contributions to a retirement plan, such as an IRA, Keogh or SEP.
Deductions and personal exemptions further reduce AGI. If you are in the 15 percent tax bracket, every dollar of deductions reduces your tax bill by 15 cents. If you are in the 28 percent bracket, your tax burden goes down by 28 percent.
Business deductions are reported on IRS Schedule C. Every trucking-related expense is deductible. If you’re in doubt, don’t assume an item isn’t deductible; document the expense and let your tax preparer decide.
Some deductions, such as those for meals, health-insurance premiums and business gifts, aren’t as clear-cut as those for permits or truck repairs. These deductions get a bit complicated.
Remember, tax write-offs are not freebies at Uncle Sam’s expense. Some truckers pay $100 a month to get their trucks washed because the expense is tax-deductible, but for those in the 28 percent tax bracket, only $28 of that $100 is deductible. If they had put that $100 a month into an Individual Retirement Account instead, they would have reduced their taxable income by $100 each month and earned interest on it for years.
Contrary to popular belief, you cannot write off as a loss the cost of deadhead miles or time waiting at a shipper or receiver. These items have already been accounted for in your normal business deductions.
After you subtract your business deductions and personal exemptions from your AGI, you have your taxable income. If you owe $5,000 in taxes on that income and have credits amounting to $2,000, you owe the IRS $3,000. Credits, unlike deductions, are full dollar-for-dollar savings on your tax bill.
Credits can include a fuel-tax credit, which applies to purchases of taxed fuel not used for driving. If you pull a reefer, for example, you should be able to recoup the tax charged for reefer fuel. This credit sometimes raises a red flag for the IRS, so be sure to keep separate receipts for reefer fuel.
Other credits include tuition credit, earned-income credit, Hope education credit, lifetime earning credit and child tax credit for children younger than 17.
Quarterly estimated tax
As a self-employed person, you are responsible for paying federal income tax in estimated quarterly installments. It’s easy to forget because the IRS doesn’t send you reminders. It simply adds a penalty and interest to your tax bill.
When you worked as a company driver, your carrier withheld federal and state income taxes from your checks and sent the money to the government. If you still owed at tax time, you paid the difference; if you overpaid, the IRS sent you a refund.
As a sole proprietor, however, you take care of the withholdings by estimating how much you’ll owe the IRS for the next year and paying it in four equal installments. Form 1040-ES helps you figure your quarterly payments.
Your estimate should be close to what you’ll actually owe, but it doesn’t have to be to the penny. Here are two general rules, according to Tax Savvy for Small Business, by Frederick Daily:
- If you earn less than $150,000, your estimated quarterly tax payments must equal at least 90 percent of your final income-tax bill or at least 100 percent of last year’s tax bill.
As an owner-operator, you have to pay into the FICA (Social Security and Medicare) coffers, just as you did when you worked for someone else. The tax amounts to 15.3 percent of net income. When you were an employee, your employer paid 7.65 percent and you paid 7.65 percent. The company was responsible for getting the money to the IRS. As an owner-operator, that’s your responsibility.
Depreciation is usually an owner-operator’s largest deduction. It involves any item expected to last more than one year, that gradually wears out and that’s used exclusively in your business. For most truckers, that means tractor and trailer, but it can apply to other equipment. A tractor is depreciated over four years, and a trailer is depreciated over six years.
Heavy-vehicle use tax
For people who own a truck and have been paying the 2290 heavy-vehicle use tax, the tax is due every Aug. 31 and is $550. When you buy a truck, you should file this form with the IRS by the last day of the month after the month when you bought the truck.
You can pay heavy-vehicle use tax in four installments, but the due dates are very strict, and the IRS doesn’t send out reminders. Check with your accountant, truck dealer or the IRS.
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