More revenue for you, less for the IRS: That should be a goal of any owner-operator business plan.
More revenue for you, less for the IRS: That should be a goal of any owner-operator business plan. Here’s an accountant’s toolbox of nine legal ways to give Uncle Sam no more income tax than he’s due.
The U.S. Internal Revenue Code is 3.4 million words long, seven times the length of War and Peace. In type this size, it would fill 41 issues of Overdrive magazine, with no room for photos or ads. It’s small wonder that income-tax advice sometimes can be complicated, especially for owner-operators.
But it can be very simple, too. Dan Prime of American Truck Business Services in Denver distills some of his best advice into a single word: File.
“Make sure you file your return,” Prime says. “You’d be surprised how many drivers come in and say, ‘Gosh, I haven’t filed a return in years.'”
ATBS handles the books for thousands of owner-operators every year. In 2005, reflecting tax year 2004, the average taxable income – net income minus all personal deductions – among ATBS clients was $23,753, and the average amount owed to the Internal Revenue Service was $5,734. A large percentage of clients, 42 percent, were owed refunds, which averaged $2,312.
If you have comparable income but are paying a lot more income tax, take charge of your situation, find an accountant who knows owner-operator trucking, and heed his advice.
“Make sure your tax preparer has handled at least 100 owner-operators,” says Kevin Rutherford of The Alliance, an owner-operator financial services company in Orlando, Fla. “If he has, you can be pretty confident that he knows the rules and will stay up to date on the rules.”
Here are some of the many topics to discuss with your accounting partner. Your fellow owner-operators are taking advantages of these tax savings. You should, too.
The per diem is the tax-deductible amount the IRS assumes you spend on meals, beverages and tips when you’re away from home on an overnight business trip.
1. Use the per diem
The per diem changed Oct. 1, 2005, from $41 to $52. Those paying taxes on 2005 income must use the old figure one last time, though, with the exception of “the people who got into the business after Oct. 1,” Rutherford says.
An over-the-road trucker who’s away from home much of the year will save money by using the per diem, rather than gathering meal receipts. “Nobody spends $52 a day on meals consistently,” Rutherford says.
For tax year 2005, 70 percent of that is deductible; that rises to 75 percent in 2006 and 2007, and to 80 percent in 2008.
Adds Russell Coffee of ATBS, “You have to pick one or the other during the year, either the per diem or meal receipts. You can’t do both.”
Because they are subject to hours of service rules and often have irregular schedules, truckers have a more complicated per diem rule than most professionals. For per diem purposes, Rutherford explains, the 24-hour day lasts from midnight to midnight and is divided into six-hour quarters.
Being out 24 hours allows you to claim one day’s per diem; being out longer allows you to claim additional quarter-days as well. But a trucker who leaves the terminal before dawn, works an 18-hour day, then returns before midnight cannot claim a per diem because he didn’t spend the night somewhere, Rutherford says.
2. Save money tax free
“If you don’t have a retirement account, start one,” Rutherford says. This helps you in the short term as well as the long term, because money in an IRA or 401(k) is, in most cases, tax-exempt until you start drawing it out at retirement.
You have until April 15 to place some of your 2005 income into an IRA or a 401(k) to help lower your 2005 tax bill, Prime says. The IRS limits 2005 contributions to $4,000, or $4,500 for those older than 50.
Individuals now can set up their own 401(k) plans, which traditionally have been exclusively an employer-sponsored program for employees, thereby ruling out owner-operators. Now, “for an owner-operator, that’s by far your best bet,” Rutherford says. Each mutual-fund company gives its individual 401(k) a different brand name, “but if it’s got 401(k) in the name, it’s the same, by law.”
Another good retirement option is a Self-Employed Pension or SEP IRA. Prime says the advantage of a SEP over a regular IRA is that a SEP’s contribution limit, calculated as a percentage of net income, is much higher. “It’s a complicated formula,” Prime says. “Consult your tax adviser.”
Retirement plans aren’t the only tax-free way to save. In his 2006 State of the Union speech, President Bush lauded health savings accounts (HSAs) as a good way to put aside tax-free money for expected medical expenses such as surgeries. Used largely by the self-employed, such plans have many stipulations and qualifications – including whether you’re eligible for coverage under a spouse’s medical plan – so check with your tax adviser, Coffee says.
Whatever your tax-free savings plan, Rutherford says, you should put money into it at least every month. He suggests an automatic bank draft to funnel money from your checking account directly into the savings plan.
3. Depreciate wisely
“In general, you want to depreciate something as fast as you can,” Rutherford says. “You always would rather pay taxes later; you never want to pay them sooner.”
The standard depreciation window for a new Class 8 truck is three years, meaning that each year, you get to deduct a third of the truck’s cost from your taxes.
Current tax law, however, makes owner-operators a tempting offer: You can expense up front, before depreciation, up to $100,000 of new equipment the year you buy it. The big problem with accelerating depreciation is that it guarantees higher tax bills when your depreciation runs out and could move you into a higher tax bracket.
The $100,000 question is “a double-edged sword,” Coffee says. “Extra depreciation now means extra tax payments later, because you’re basically reducing your future expense deduction.”
Most likely to benefit from the $100,000 option are newbies who just bought their first truck but neglected to file their quarterly estimated tax payments their first year as owner-operators. They face a huge lump-sum tax bill and may need the aggressive depreciation to bail them out, Coffee says.
Knowing how depreciation works can save money in other ways, too. Too many rookies buy a truck in December as a Christmas present to themselves, Rutherford says. A few days later, when the calendar year changes, “you’ve got all kinds of depreciation but no income. Do a little more planning, save your money, and wait until January to buy.”
4. Keep good expense records
Legitimate deductions always are worth the trouble. If it’s a business expense, keep a record of the purchase so that you can deduct it. Even a $2 purchase, properly deducted, could save you 50 cents in taxes, and those savings add up. “Without good records, you will lose deductions and lose money,” Prime says.
Save and label receipts, maintain an expense log, and categorize them at the end of every run, not just once a year. “If you wait until the end of the year to collect all your receipts, you’re losing money,” Rutherford says. “You’ll never remember all that stuff.”
A receipt is the most obvious evidence of a purchase, but you also can use canceled checks, bills, credit-card statements, invoices, an expense notebook – anything showing when, where, what you bought and how much you paid.
Don’t be too quick to label expenses “miscellaneous,” either. “The more specific you can be, the better,” Rutherford says. “What category it goes under is not all that important, as long as you’re consistent. Don’t count an oil purchase as a fuel expense in one period and a maintenance expense in another period.”
Don’t overspend on supplies, equipment and services in your zeal to accumulate deductions, Prime says.
Remember that you can’t recoup 100 percent of those expenses through deductions, only a portion of them.
Good recordkeeping saves you money and keeps you out of trouble. An owner-operator tracking his expenses throughout the year stays on top of his operation and has less to fear from the IRS in an audit-happy era, Coffee says.
“In the past 18 months or so, the IRS has been really heavily into compliance, assessing really heavy penalties,” he says.
“I’ve been doing this for 23 years, and I’ve never seen anything like it.”
Other than honesty, the best protection from audits and penalties is good record keeping, Coffee says. “In the event of an audit, items without documentation will be disallowed.”
5. Track personal vehicle miles
“Driving your personal vehicle to the bank, the post office, a business meeting, a truck show, even to the grocery store if any of your purchases were business-related – all those miles become deductible as a business expense,” Rutherford says. “You just have to keep a log.”
That personal-vehicle log needn’t be as formal as your log book. It could be a notebook you keep in the glove compartment or on the dashboard, in which you jot the date, mileage and purpose of each trip.
At press time, the IRS deduction for business miles was 40.5 cents per mile, but it has fluctuated in recent months. “They tend to adjust that with gas prices, so when gas prices are volatile, the mileage deductible is volatile, too,” Rutherford says.
There also are smaller deductions for personal uses of a personal vehicle: 15 cents a mile for medical-related trips and miles incurred in moving, and 14 cents a mile for charitable trips, such as Meals on Wheels deliveries.
6. Create a home office
When they’re home, many owner-operators scatter their business throughout the house – files in the kitchen, computer in the den, books and magazines in the bedroom – rather than dedicating a single room to business, Rutherford says.
If you have a dedicated home office that occupies, say, 5 percent of the square footage of your house or apartment, then 5 percent of home-related bills – utilities, insurance, etc. – can be deducted as a business expense.
“The room should only be used as a home office and nothing else,” Rutherford says; that goes for use of your computer, too.
“Also, keep all the receipts. But don’t listen to an accountant who says the home office deduction is a red flag.”
7. Hire the kids
“Putting your kids on the payroll is a great idea,” Rutherford says. “If I put my child on the payroll and pay her $4,000, she pays no tax on it because she didn’t make enough, and I pay no tax on it, either. Just make sure they’re doing work that’s reasonable for their age, and keep documentation of it.”
The work could be cleaning the truck’s exterior or interior, or simple maintenance chores or paperwork that you direct. Documentation includes doing the W-2 paperwork when Junior is hired, just as you would do with an adult employee, Rutherford says.
“Putting your spouse on the payroll, on the other hand, does absolutely nothing to help you at tax time,” Rutherford says, because IRS rules treat a spouse differently.
8. Give to good causes
“Charitable donations are always good if you’re itemizing,” Rutherford says. Donations to trucking-related nonprofits such as Trucker Buddy are tax-deductible, as are donations to more common recipients, such as churches and the American Red Cross.
Gifts to business associates are tax-deductible, too, but carry servere limitations, Rutherford says.
The IRS will allow you to deduct only $25 in gifts per associate per year. And if you’re leased, keep in mind that some carriers have policies against gifts to dispatchers or safety officers because it looks like bribery.
9. Account for the hurricanes
The IRS has granted a number of tax breaks to residents of Alabama, Florida, Louisiana, Mississippi and Texas who were affected in 2005 by hurricanes Katrina, Rita and Wilma.
For example, if you housed a hurricane refugee, you can claim an additional dependent exemption of $500.
The details of this and many other provisions are in IRS Publication 4492, “Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma,” available at this site.
It’s complicated, so make sure your tax preparer gets a copy.
A PARTIAL LIST OF DEDUCTIBLE EXPENSES
As long as these expenditures are business-related, they are deductible. When you are unsure whether a cost is deductible, document it and check with your accountant.
Flashlights and lanterns
Nuts and bolts
SERVICE AND MAINTENANCE
Oil and oil changes
Truck and trailer washes
Antifreeze and coolant
Chrome polish and cleaning supplies
Windshield washer fluid
Cell phones and cell phone bills
Long distance business calls
Postage/overnight mailing charges
CAB AND SLEEPER SUPPLIES
Sheets, pillowcases and blankets
Atlases and maps
Televisions, VCRs and DVD players
Federal Highway Use Tax
Doctor and dental visits
Health insurance premiums
Mileage in personal vehicle
Home office expenses
Signs and lettering
Coin-operated laundries and laundry supplies
ATM fees and other bank fees
Dues in business organizations
DON’T EVEN THINK OF PLEADING FOR MERCY
Truck-stop wisdom holds that owner-operators needn’t sweat their IRS obligations, because they always can negotiate a deal to pay their back taxes at a few cents on the dollar. Such deals are called Offers in Compromise, or OICs. They do exist – but, most likely, not for you.
“If you’re old and in bad health, the IRS will settle,” says Dan Prime of American Truck Business Services. “If you’re young and in good health, the IRS is never going to settle, because they know you’ll be able to pay them in full eventually.”
Some companies offer to file OIC claims for $2,500 to $5,000. ATBS and owner-operator accountant Kevin Rutherford say that in most such cases, the filing accomplishes nothing, the owner-operator is out thousands of dollars, and the IRS still wants its full amount due. In the rare cases when requests are granted, the offer usually is much higher than, say, 5 percent of the debt.
“OICs almost never happen,” Rutherford says. “The IRS has 10 years to collect a debt once they recognize that there is a debt. So until they recognize that you owe them money, that 10-year clock doesn’t even start. They could audit you in 2006 and ask for 1994 taxes and have until 2016 to collect them. They’re not going to accept an OIC now even if you’re broke, because your situation could get better.”
The exceptions, Rutherford says, tend to be extreme cases of severe illness or disability, homelessness, prison – situations you don’t want to experience. It’s simply easier to work out a long-term payment plan with the IRS.