Credits come straight off your tax bill. If figuring your adjustments and deductions leaves you with a tax bill of $5,000, and you have $2,000 in credits, you owe $3,000. These include tuition credits, earned-income credits and a fuel-tax credit for fuel not used for driving – reefer fuel, for example.
Deductions show the taxman that you invested income back into your business. The savings aren’t dollar for dollar, but they mount up. For example, if you’re in the 15 percent tax bracket, every $100 in deductions cuts $15 off your tax bill.
In tax season, owner-operator John E. Smith of Jackson, Neb., has even more reason than usual to love his mother.
“I was lucky,” Smith says. “My mother is a CPA, and I grew up learning about taxes and deductions. But most owner-operators haven’t a clue about taxes.” For them, “A good accountant with a lot of expertise in the trucking industry is an absolute must,” Smith says.
Harold Ohrberg of Silvis, Ill., an owner-operator for only a year and a half, says that’s the second tax lesson he learned. “Last year I used a local guy who does taxes, but he wasn’t a CPA and didn’t know a lot about trucking,” Ohrberg says. “I think I could have done better.”
His first tax lesson? “Save all receipts for everything,” Ohrberg says. “Even if you think it’s not deductible, it might be.”
There may be no such thing as a happy taxpayer, certainly not among owner-operators. But becoming a savvy taxpayer is relatively easy. By keeping in mind a few basic tips all year, you can save time, trouble, money – and maybe even your sanity – during tax season.
Things that cut your tax bill fall into three categories:
- Adjustments reduce your gross earnings, giving you adjusted gross income. For example, you can subtract from your gross earnings any contributions to a medical savings account or to a retirement plan.
DEDUCTIONS: USE THEM OR LOSE THEM
Deduct every possible business-related expense, says Tom Sonricker of Transport Business Solutions in Kernersville, N.C. “Once you don’t take it, it’s gone.”
On the other hand, don’t buy an accessory or service you don’t really need just because it’s deductible. Remember, you’ll get only a fraction of your money back in taxes.
Be careful not to claim personal expenses as business expenses. If you’re driving the pickup to a meeting with your dispatcher, that mileage is deductible; if you’re loading the kids and heading to Disney World, that mileage is not.
With some expenses not so easily divided – the power bills at your home office, for example – formulas exist for calculating the deductible total. And there are gray areas that depend “upon the aggressiveness of the individual and the preparer,” Sonricker says.
For example, in-cab television equipment is business-related when you’re watching the Weather Channel, but not when you’re watching Jackie Chan movies. “Deducting a TV could be justified,” Sonricker says. “Satellite service I would have a hard time with. Satellite radio fees, probably deductible. Videocassette rentals, no, unless they’re training or informational videos.”
In short, when tallying deductions, use common sense, keep good records and listen to your tax preparer.
The Internal Revenue Service, stung by controversy in recent years, is trying to assure taxpayers – and their congressmen – that audits are now kindler and gentler than the sweat-inducing line-by-line interrogations of the past. Still, audits are a fearsome prospect for most owner-operators.
But an audit is no problem if you keep good records, says Perry Wiseman of Truckers Accounting Service in Omaha, Neb. The principle is simple: “Every single deduction should be backed up by a receipt.”
Costs that don’t generate receipts – showers, coin laundries, newspaper racks, vending machines, business-related travel in a personal vehicle – should be recorded in a ledger or notebook by date.
“Also, keep your log books, so that you can verify the days you were out on the road,” Wiseman says. He knows a trucker who had all her meal deductions thrown out during an audit because she no longer had her log books for that time period.
And remember that an audit may extend back several years, so don’t be in a rush to throw out this stuff. “But if you have the backup, if you have the documentation, there’s nothing to be afraid of,” Wiseman says.
BE EARLY AND ORGANIZED
“Get your taxes done soon,” Sonricker says. “Get all your information together and get a draft of your return done so you can see where you stand.”
One reason is that you can still do things to cut your 2001 tax bill, such as put money into an Individual Retirement Account or – if you bought a truck or other big-ticket item last year – claim up to a $24,000 Section 179 depreciation. These are options you should talk over with your tax adviser, and not in a panic the night of April 14, Sonricker says.
“I have yet to do an owner-operator return where I didn’t have at least one full legal-pad sheet of additional questions to ask, pulling out additional deductions they are entitled to,” says Kathy Sturm of Progressive Business Services in Cookeville, Tenn. “We ask, ‘What about parking?’ and so on. We tend to get another $2,000 to $3,000, or more, of additional expenses that otherwise would have been missed.”
Set aside every official year-end financial document that arrives in the mail so that neither you nor your tax preparer has to rummage for them, Sonricker says.
Don’t dump “a big shoebox full of receipts” on your accountant, Wiseman says. The preparer can’t tell from a long, unmarked Wal-Mart receipt, for example, which are business items and which personal.
You’re better off, Wiseman says, spending quality time with your receipts beforehand. Divide them into piles by category – fuel, meals, maintenance and so on. This is easier, of course, if you habitually label and file receipts as you generate them. Use a calculator or adding machine to total expenses in each category before delivering it all to the tax preparer.
This ensures you get all the deductions that are coming to you. It also educates you about your annual expenses, speeds the preparation of your return and reduces the fee your tax preparer will charge. If you can cover all those bases, at least you’ll get the satisfaction of having done all you can to alleviate the unpleasant chore of paying taxes.
DEPRECIATION: AN APPRECIATION
If you bought a truck before 2001, it’s too late to use Section 179 depreciation, which is a one-time-only, year-of-purchase deal. Here’s how it works:
$24,000 times .15 equals $3,600
$24,000 is the deductible first-year depreciation on tractor bought in 2001.
.15 is for owner-operator in 15% tax bracket
$3,600 is the amount of money saved in tax savings
In this example, if the truck cost $100,000, then depreciation will be figured from $76,000 ($100,000 minus $24,000) for the rest of the truck’s depreciable life.
MYTHS AND MISTAKES
Can I deduct extra for my deadhead miles? No, you can’t, Kathy Sturm says, because you’re already deducting all the expenses of all your miles, loaded and empty – fuel, tires, meals and so on. “That’s the one I get over and over again,” she says. “I realize actual miles are always more than paid miles, but that’s trucking.”
I own a sleeper, so I don’t save my hotel receipts. Motel expenses while you’re on the road are deductible even if you own a sleeper. Too many owner-operators don’t save motel receipts, which they need, but do save meal receipts, which they don’t need.
Here are my meal receipts. A percentage of your on-the-road meal expenses is deductible, but owner-operators should figure it using the federal meal allowance of $38 a day – known among tax preparers as the “per diem” – rather than trying to calculate actual meal expenses, Sturm says. “The per diem always works out to their advantage, since most of them don’t save all their meal receipts, nor do they spend more than $38 a day on meals,” Sturm says. For your 2001 taxes, the deductible expense is 60 percent of the per diem, or $22.80 a day. Next year, the percentage will be 65 percent; by 2008, it’ll be 80 percent.
What do you mean, I owe a social security tax. New owner-operators often get a rude shock when they find they’re responsible not only for self-employment taxes but also for Social Security taxes, which their employers used to take out of their paychecks fairly painlessly, Tom Sonricker says. “They don’t understand they’ll have to pay those taxes themselves, and they don’t realize how large that number can be,” Sonricker says. The cut is 15.3 percent of net self-employment income – gross revenue minus business expenses, including depreciation – or $15.30 out of every $100 you earn. “It’s easy to spend that money when you’ve got it, and not put any aside for the taxman,” Sonricker says.
I’m broke right now, so I need an extension. “An extension is not a way to delay paying your taxes,” Perry Wiseman says. Rather, it only postpones the deadline for filing the return. The IRS will wait on the forms, but not the payment. “They’re going to tack on interest and penalties because you didn’t pay on time, even if you filed an extension,” Wiseman says.
I’m African-American. Can I claim the Slavery-Reparation Tax Credit? No, because there’s no such thing. The IRS receives thousands of requests for this mythical form every year.
Whew! I’m done. Time to seal the envelope. Not quite. The dumbest, most common mistake made by taxpayers – yes, including owner-operators – is forgetting to sign the return.
I’m sure glad I don’t have to pay taxes for another year. Sorry. Estimated income taxes are due quarterly – April 15, July 15, Oct. 15 and Jan. 15. Skip these, and the IRS will bleed you thoroughly with penalties and interest.
Those really hurting financially have good news for next year: The lowest bracket for 2002 income drops by a third to 10 percent.
A FEW NEW BREAKS FROM UNCLE SAM
Tax laws change every year. These latest changes, affecting your 2001 tax return, are all for the better.
Deduction for business mileage in a personal vehicle
Last year: 32.5 cents/mile
This year: 34.5 cents/mile
Tax credit per child
Last year: $500
This year: $600
Section 179 deduction for new-truck depreciation
Last year: up to $20,000
This year: up to $24,000
Last year: 15%