How to Lower Tax Bill: Tax Moves for Truckers
Are you a trucker, contemplating how to lower your tax bill? In this article, you will learn about truckers’ tax deductions, choice of business structure, and other ways to save money on your taxes. Operate your trucking business without surprises and have your tax mind at ease.
Why should you estimate your tax quarterly?
Did you know that in 2015, 10 million people were subject to estimated tax penalties? To avoid this penalty you should pay the estimated tax every quarter. According to IRS
“If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.”
You are required to pay your taxes during the year as you earn income instead of paying at the year-end.
As an owner-operator, if you expect your tax liability to be $1000 or more after taking into account all your deductions, you are required to make estimated tax payments to the tax authority every quarter.
Your estimated tax payments are due on the 15th day of April, June, September, and January the following year. The IRS may impose additional penalties if you miss the payment deadline. So make sure you file your taxes and pay your estimated tax on time.
How getting taxed as an S-corporation will save your tax?
Small trucking companies often register under the IRS as an S-corp. By electing S-corporation status you can save money in two ways.
- Federal Insurance Contributions Act (FICA) taxes: also known as payroll taxes. S-corporation allows the owner to withdraw money as salary. For e.g. Burt, a single member of the S-corporation, received a salary of $40000 per annum from his company after taking into account the withholding tax. As an owner Burt is allowed to deduct 40000 plus the payroll expenses from his total earnings to arrive at a taxable income. If Burt was operating as a sole proprietor, this deduction would not be allowable and he would also have to pay self-employment tax which is higher than payroll taxes.
- Avoid Double taxation: In the above example if Burt decides to pay himself a distribution from the profits he would not be liable to pay further tax since he already paid taxes on profits. On the contrary, if Burt was operating as a C-corporation his distribution would be taxed. Since the earning is taxed twice it is called double taxation.
You can seek advice from a tax expert to find out what works best in your specific situation.
How much IRA Contribution is tax-deductible?
Truckers can benefit from the Individual Retirement Account (IRA). Individuals can make contributions to traditional IRA to safeguard themselves in old age. You can make an annual contribution of $6000 or $7000 if you are age 50 or older.
You can deduct these contributions in full if you and your spouse are not covered by a retirement plan at work. However, your deduction can be limited if your income exceeds a certain level.
It is important to note that these pre-tax contributions will be taxable at your usual income tax rate when withdrawn.
What should you opt for a Lease or Purchase?
While setting up a trucking business you need to decide whether to purchase your trucks or lease them.
- Purchase: Section 179 of the US internal revenue code is an applicable tax law for truck drivers. There are two choices regarding what to report on a truck driver tax return deductions. One of the options is to take section 179 deduction i.e. immediate expense deduction of the entire cost of purchase. Another is to capitalize it and later depreciate it and report lower deductions over a period of time.
- Lease: When it comes to leasing your truck you might ask this question. Are truck payments tax deductible? Yes, your monthly lease payments are deductible in full.
A professional advisor will be able to advise whether to purchase or lease a truck based on your specific situation.
What are the Truckers’ Tax Deductions
While driving on the road truck driver’s expenses include fueling and food. Before the Tax Cuts and Jobs Act, the employed drivers were allowed to deduct more business expenses. But now with this new law in place they can claim fewer deductions.
However, if you are an owner-operator below is a list of truck drivers’ write-offs list.
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Meals
- Meals are an allowable deduction if you travel a long distance away from your tax home. And your stops include a layover. This means a stop with a resting period. There are two methods for this deduction.
- Per Diem Rate: This method is easy as drivers can deduct a fixed amount per day. However, this amount varies based on when and where you traveled.
- Actual Expense method: In this method, truck drivers can deduct up to 80% of their actual meal expenses. A lot of effort is required to keep track of what you actually spent and whether or not your stops had a resting period.
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Cell Phone and internet fees
- If you purchased a phone or a new laptop you can deduct the entire amount you paid. However, the IRS allows you to deduct 50% of the cost incurred related to cell phones and internet fees as they are used for both professional and personal reasons.
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Medical Checkup
- Out-of-pocket medical fees are deductible if your employer requires you to have a medical exam or if it’s work-related. However, to qualify for deduction there is a minimum spending requirement that should be met.
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Fuel and other travel costs
- If you are an independent contractor, you are allowed to claim the mileage along with other automobile expenses such as maintenance. For truck drivers in general, if your cost of fuel is more than $100 and your employer doesn’t compensate for it, you are allowed to deduct the expenses.
There are several other deductions that you are allowed to claim as a trucker. It is important that you talk to your tax advisor and seek advice that works in your particular situation.