What type of tax deductions for truckers are available?
Owner-operators who aren’t familiar with tax laws should employ the services of a qualified accountant or CPA to maximize the benefits allowed by law. However, the more informed a trucker is about tax laws, the more effective his or her tax preparer can be. Some trucking companies may also provide help with tax questions.The primary goal is to reduce total gross income as much as is legally allowed through deferrals and deductions (standard or itemized). A tax bill can be even further reduced through certain transactions that are exempt from federal tax, through applicable tax credits, and through income shifting (shifting income from a higher tax bracket to a lower tax bracket).
Deferrals. Tax deferral is simply a method used to postpone paying taxes until some time in the future. It usually refers to retirement plans, where money is invested and grown over time.
Deductions. Deductions are the most common form of tax bill reduction. There are standard deductions, itemized deductions, and business deductions. Standard deductions are available to all taxpayers who don’t itemize their deductions, and the amount is based on one’s filing status.
Owner operators typically handle so many transactions, however, that using standard deductions is generally less attractive. Itemized deductions fall under one of the following categories: medical and dental, taxes, interest, charitable contributions, casualty, and miscellaneous. Some limitations apply to the types and amounts of itemized deductions. Business deductions are by far the most common itemized deductions for owner operators and small trucking companies. In general, almost any item purchased that would not have been purchased had the individual not been a truck driver or employed in the trucking industry is a legitimate expense.
Major Deduction Categories
1. Trucking expenses
The largest single deduction category for an owner-operator is trucking expenses: depreciation, fuel, batteries, insurance, oil and lubricants, registration and license fees, repairs, fires, and tolls. Depreciation will likely be the most substantial trucking expense. Depreciation is a complicated issue but in simplified terms, depreciation means applying a portion of the book value of an owner-operator’s equipment each year to his/her taxes until the value reaches zero. If a trucker owns his/her own trailer, it too, is subject to depreciation.
2. Health insurance
Another valuable deduction for a self-employed owner-operator is health insurance premiums. Owner-operators may be entitled to deduct a percentage of the cost of a health insurance premium. If a spouse is employed in a driver’s operation, a complete deduction for the cost of health insurance may be allowed.
Eating on the road in trucking is a unique situation because it is considered a job related expense. In spite of ongoing lobbying efforts to allow the deduction for meals on the road to 100 percent, the deduction stands at 80 percent. As an alternative, drivers can deduct the standard per diem of $59 per day for 2010. If an owner-operator doesn’t have the receipts to back up meal purchases, he/she may elect to use the per diem rate.
4. Home office
Home office deductions should not be overlooked. It’s possible to deduct a portion of an owner-operator’s home used as an office as a business expense. Although there are a number of restrictions, home office deductions can be a substantial source for tax savings.
Paying Estimated Tax
Owner-operators, because they are self-employed (and don’t typically meet one of the safe harbor exceptions), are required by law to pay estimated taxes every quarter. Estimated taxes intimidate some owner-operators, who put off paying quarterly taxes and get penalized at tax time.
The IRS requires these payments, regardless of whether drivers independently contract for trucking companies or work directly for themselves. Since taxes aren’t withheld from compensation received from brokers or trucking companies, owner-operators (and all self-employed people) should submit estimated income tax payments to the IRS each quarter.