Tax time is always a headache for drivers and trucking companies, but this tax season they are facing the most far-reaching changes in tax law since the 1980s, thanks to the December 2017 tax code legislation.
The changes are meant to cut taxes for most taxpayers, but the maze of new regulations is bewildering many, even veteran owner-operator truck drivers and carriers.
“They are confused, definitely because this is a sweeping change, more than 1,000 pages” of new federal tax code, said Todd Amen, chief executive of American Truck Business Services of Lakewood, Colo. ATBS recently published a free e-book on the effects of tax reform on owner-operators.
To help figure out which changes apply to your trucking operation, here are five questions to answer before filing taxes this year
Did you lose the per diem allowance?
Per diem covers part of the cost for meals and incidentals a driver purchases while spending the night away from home on business. Tax reform eliminated per diem for employee truck drivers – those who get an annual W2 wage statement from their employers. Amen estimated the loss of per diem could amount to $12,000 to $15,000 a year for a driver before accounting for tax reform’s lower tax brackets.
Self-employed trucker drivers, or owner-operators, still qualify for the per diem deduction. These drivers receive an annual Form 1099 from their customer companies showing how much they were paid during the year. Owner-operators can still deduct 80 percent of the per diem rate, which is set by the Internal Revenue Service. The current rate is $66 per day.
Questions about per diem are “by far” the most common from trucking clients, said Troy D. Hogan, a director in the Transportation Services Group at Katz, Sapper and Miller of Indianapolis.
More trucking companies are setting up a company-sponsored per diem plan, often as a competitive tool, he said. That allows a company to pay its drivers per diem, often on a cents-per-mile basis.
“After tax reform, I see a lot of companies putting them in place,” he said. “No trucking company owner wants their drivers to face a tax increase.”
Where do you fall in the new lower tax brackets and the higher standardized deduction limits?
There are still seven tax brackets for individual taxpayers. But the tax rates for all but the bottom bracket are lower. For example, for a married taxpayer filing jointly, taxable income of more than $153,100 but not more than $233,350 will be taxed at a 24 percent rate, down from 28 percent before tax reform.
Meanwhile, most truckers will no longer need to worry about listing itemized deductions on a Schedule A. That’s because tax reform roughly doubled the standard deduction. For married taxpayers filing jointly it jumped to $24,000 from $12,700 pre-reform.
Before tax reform, an estimated 30 percent of truckers used itemized deductions, according to ATBS. Post reform, only about 8 percent will qualify, said the company.
The corporate tax rate, paid by businesses organized as C-corporations, also fell. But most trucking businesses are not organized as C-corporations, according to industry experts. Trucking businesses are more often organized as sole proprietorships, partnerships or S-corporations, which pay at the individual income tax rate because the business income flows through to the individual owners. A limited liability company is not a recognized taxable entity by the IRS. Instead, it treats an LLC with at least two members as a partnership for tax purposes. Single-member LLCs are taxed as sole proprietorships.
Do you qualify for the new business income deduction?
This new deduction lets taxpayers write off 20 percent of their business income, subject to IRS rules. Qualified business income includes the business’s regular income, less any deductions and losses. Employee wages and capital gains are excluded.
Income thresholds also apply.
Married, filing jointly? Then qualified taxable business income must be $315,000 or less to take the full 20 percent tax deduction.
For all other taxpayers, qualified taxable business income must be $157,500 or less to qualify for the deduction with no restrictions.
Businesses organized as C-corporations don’t qualify for this deduction. They already benefit from tax reform’s new, lower corporate tax rates. But S-corporations, limited liability companies and partnerships do. As mentioned above, these types of businesses pass their profits through to their owners, where the income is taxed at an individual rate.
Can you use the generous new bonus depreciation rule?
“Bonus depreciation is a huge win for the trucking industry,” said Hogan. “I’m seeing a major impact on taxable income, in a good way.”
Starting with the 2018 tax year, a business can deduct 100 percent of a commercial truck or other business equipment purchase as a bonus depreciation. A depreciation is a type of deduction. Before tax reform, the deduction was limited to 50 percent of the price.
One big change is that used equipment purchases now qualify.
This does not last indefinitely. The write-off drops to 80 percent of the purchase price in five years. It continues to decline until it hits zero at the end of 2026.
Did your business lose money in 2018?
If so, new rules on how to deduct the losses apply. A business can now carry forward its net operating loss indefinitely. That means it can break up the amount of its loss and deduct it against future income tax owed for as many years as it wants until the amount is used up. Before tax reform, the loss carry- forward was limited to 20 years.
Two other big changes to be aware of: The amount of the loss can no longer be carried back and used to offset income tax owed in prior years. And it can no longer be used to offset 100 percent of taxable business income. Tax reform limited the offset to 80 percent of taxable income.
These changes have altered how trucking companies are timing purchases and other business decisions, Hogan said.
“Pre-tax reform, we would to some extent not really worry about the future,” he said. “We would write off everything we could, generating the biggest losses we could because we know at the end of the day they would just carry forward to next year.”
The new tax rules have changed that strategy, he said.
“Now we try to plan a smoothing out of income” over multiple years,” he said. “We don’t create big losses if they are not going to benefit us.”
New rules apply to deducting what the IRS considers excessive business losses. Before tax reform, an individual could use an unlimited amount of the losses attributed to a business to offset income not related to the business, such as dividends.
Under tax reform, that deduction is limited. For example, for a married taxpayer filing jointly, the deduction is capped at $500,000. Any losses over that are labelled excessive by the IRS and must be considered a net operating loss. And those, as noted above, are now limited when it comes to using them for offsetting income. Now just 80 percent of the net operating loss can be used.
With tax filing deadlines approaching quickly, now is the time to answer these key questions about how tax reform will affect your trucking business. March 15 is the tax due date for businesses that are set up as C-corporations, S-corporations or limited liability partnerships. April 15 is tax day for other types of businesses, including single-member LLCs and sole proprietorships.