Commonly Misunderstood Tax Areas Affecting Independent Contractors
There are several tax areas that seem to consistently cause confusion that we would like to discuss.
A common misconception concerns deadhead miles. There are many owner-operators and tax preparers who think that income lost as a result of deadhead miles is a deductible item. That is not the case.
Only the cost to operate the truck, i.e., fuel, repairs, maintenance covering those deadhead miles is deductible. Additionally, many truckers often ask whether doing their own maintenance is a deduction. You cannot deduct your time for working on the equipment.
Even though you're not able to deduct your time the benefit is that you are saving the cost of having someone else do the work.
Some owner-operators do take a deduction for deadhead miles as well as a deduction for doing their own repairs. However, if they are audited, those deductions will be disallowed and they will be paying not only the tax owed, but penalties and interest as well.
Taxable gain on sale or disposition of equipment
This area is often misunderstood and results in having to pay penalties and interest to the IRS. When you sell equipment that has been fully depreciated, you have a taxable gain to report.
For example, you purchase a tractor for $60,000 and you hold the tractor long enough to claim $60,000 in depreciation. You now have an adjusted basis of zero.
You then sell the tractor for $20,000; you now have a $20,000 taxable gain. Many truckers and their tax preparers think that in this situation there would be a $40,000 loss since they paid $60,000 for the truck and sold it for $20,000.
That is not the case as illustrated by the example we have just given you. A benefit to trading equipment instead of selling is that the gain on equipment that is traded is not reportable to the IRS (i.e. no taxable gain); however, it does lower the basis on the new equipment.
There is also a benefit to selling equipment (i.e. not trading) and reporting the gain. Your tax advisor can explain this to you. Also, if you happen to run into financial trouble and the truck is repossessed, you can still have a gain if the balance of the loan is greater than the truck's adjusted basis.
How long should keep your records?
There are many different opinions as to how long to keep tax records. We suggest to our clients that they keep records for the past 5 years and if they have enough space, we encourage them to keep seven years worth of tax information and returns. This is especially true of our self-employed clients.
Estimated income taxes
Many truckers who do not pay their estimated income taxes on a quarterly basis and prefer to wait until the end of the year are often surprised to find out that they have been charged penalties by the IRS.
The point here is that the IRS wants to get their money on a timely basis throughout the year and so they have set up a method of paying estimated taxes four times a year.
If you do not adhere to this schedule, then you are subject to penalties for underpayment of your taxes. If you are unable to pay the full amount set up by your tax preparer, pay as much as you can instead of not paying at all.
This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. Contributions to this article were made by Shasta May, Director Business Development for PBS. If you would like further information, please contact us at 800-697-5153.
Everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.
PBS Tax & Bookkeeping Service Homepage