Ask Gary: ‘Too much profit’? Be leery of accountants obsessed with tax avoidance

Updated May 23, 2022

Ovd Ask Gary202011190854Ask Gary is a series detailing owner-operator business challenges and how operators can navigate toward success. Gary Buchs, a former Owner-Operator of the Year, spent 17 years as an independent contractor at Landstar before retiring in 2019. He now coaches owner-operators and also hosts the Truck Business Forum group on Facebook. Buchs can be reached at [email protected].

The situation: An owner-operator who had a solid year and turned a strong profit has found a tax preparer who told her she has “too much profit.” The preparer said she needs to find ways to spend down those hard-earned gains, possibly even buying a new truck, to avoid paying taxes. The owner-operator contacted the tax preparer because they promised to cut her tax liability to little or nothing. Should the operator start a spending spree to reduce her business’ income so as to avoid paying taxes? Or pony up and pay the taxes and spend the proceeds in other ways?

Gary’s fix: "Too much profit"? I would be leery of any accountant that says that. But there are too many tax preparers who sell themselves on that idea. 

When I was an owner-operator, I was often told, “You should buy a new truck. Otherwise, you’ll have to pay taxes.” That doesn’t make sense. Why would I spend tens of thousands of dollars to avoid paying much less in taxes?

The point of being in business is to earn a profit, not to avoid paying taxes. That’s not to say you shouldn’t take advantage of available deductions, and that might include buying a truck or other business equipment, but you shouldn’t spend down your profits just to bring your tax bill to zero.

Doing so reflects a troubling mentality a lot of owner-operators have about their tax bill. It causes them to make bad decisions that might benefit them in the short-term but harm them greatly in the long-term.

I have run into owner-operators who will dump their accountant and try to find a new one if they have to pay taxes. Instead, look at profit as an opportunity to invest in yourself or your business.

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One problem operators often have is they invest everything in just the truck and other depreciating assets. If you buy a new truck for $150,000 to lower your tax liability over three years, and you’re writing off an estimated $50,000 a year, you’ll still wind up with something worth only $30,000-$35,000 after three years. Had you just paid taxes on your profit, it would have been a lot less than $150,000.

We usually pay far less in taxes than we realize. For example, if you netted $100,000 as a sole proprietor, you can put 20% into a self-employed retirement account pre-tax. Then, take the qualified business income (QBI) change from the 2017 tax cuts, and you knock another 20% off of the remaining $80,000 – so now you’re down to $64,000. If you’re married, you can take $25,000 off for the standard income deduction, so that puts your taxable income at $39,000. 

Not counting self-employment tax, your income tax bill would be $4,483, a tax rate of 11.5%. That’s far less than the presumed 35-40% I often hear owner-operators throwing around as their tax rate.

It’s also a lot less than $150,000 for a new truck, and it leaves you with about $60,000 in take home pay after taxes and after pre-tax retirement contributions. If you put some of that money in a post-tax retirement account (such as a Roth IRA), mutual fund, stocks, real estate -- any asset that's likely to appreciate -- that’s money that will be available for your future.


Related: Are tax changes relative to equipment investment and depreciation enough to move you?

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