2018 is coming to an end which means it’s time to make sure you have minimized your tax bill for the year. Due to the many recent changes in the tax code, it’s important that you are informed of how your taxes will be affected as a truck driver.

There are many things you can begin doing now to make filing your tax return as easy as possible and reduce the amount you owe. Let’s take a look at a few of the most important tax moves to make before 2018 comes to an end.

If you would rather learn about this information via video, click below!

1. Buy Assets - ONLY if you Need Them

shutterstock_101354299.jpgIf you are in need of a new truck or piece of equipment for your business, it may be worth purchasing it before the year ends. Purchasing equipment for your business could allow you to reduce your tax liability because of new depreciation rules.

The new tax laws allow your business to take an immediate first-year deduction on any asset purchased during the year. This is because any qualified property purchased and placed in service between September 27, 2017, and January 1, 2023, can be depreciated by 100% of the cost of the property. The cost of the depreciated piece of property will be recognized as an expense and lower your taxable income.

But, before you go out and make a big purchase in order to take advantage of the new depreciation rules, there are a few things to consider.

  1. This deduction shouldn’t motivate you to purchase things that you might want, but won’t help your business make more money.
  2. A higher deduction in the present means you will likely have a lower deduction in the future. If your business is growing, this can lead to problems when your business moves into a higher tax rate.
  3. If an asset is sold for more than its adjusted basis*, then tax law states any excess depreciation that was deducted on prior year's returns (up to the amount of the sale price) is considered taxable income. This means if you end up selling an asset for more than its adjusted basis, tax law requires the IRS to take back the depreciation deduction and the recaptured depreciation profits will be taxed as income. 
    *Adjusted basis is the original purchase price minus any depreciation deduction allowed on that piece of equipment.

2. Calculate your Per Diem Deduction

Per diem is the tax deduction that the IRS allows to substantiate ordinary and necessary business expenses paid or incurred while traveling away from home. In simpler terms, it is a deduction for meals and incidental expenses for the days you are on the road and away from home for a period of time that requires sleep or rest to complete your job duties. This deduction was eliminated for company drivers under the Tax Cuts and Jobs Act (TCJA) but remains a deductible business expense for owner-operators.

Effective October 1, 2018, the per diem rate increased from $63 to $66 per full day and $47.25 to $49.50 per partial day. The deduction is quoted at $52.80 for a full day and $39.60 for a partial day because the IRS only allows you to deduct 80% of the rate. This means the per diem deduction between January 1, 2018, and September 30, 2018, is $50.40 for each day and the per diem deduction between October 1, 2018, and December 31, 2018, is  $52.80 for each day.

Taxpayers are required to keep track of their days on the road in order to claim a per diem deduction. ATBS recommends keeping a per diem calendar where you mark an “X” for full days and a “/” on partial days to keep tracking per diem simple. To prove your Per Diem, you will also need to provide DOT ELD logs with times, dates, and locations.

To get a better understanding of Per Diem, check out our Seizing the Per Diem Tax Break article.

3. Calculate your Qualified Business Income Deduction

The Qualified Business Income Deduction is another change as a result of the Tax Cuts and Jobs Act. This is a 20% deduction on your adjusted gross income that reduces your tax liability. The deduction was created to improve the benefits of pass-through entities who didn't receive the significant tax cuts that were given to C corporations and W2 Employees. You don’t have to change anything with your business, as all self-employed individuals are now considered pass-through entities.

As an owner-operator, chances are you will qualify for this deduction. For all taxpayers who are filling as single, head of household, and married filing single, the range to keep an eye on is $157,500-$207,500 of taxable income. If you’re filing as married filing jointly, your range of taxable income to keep in mind is $315,000-$415,000. If your taxable income falls below the range, you will qualify for the 20% deduction on your gross income.

Let’s take a look at an example of how this will work. If your taxable income for the year is $65,000, you will be able to deduct an additional 20% of this amount, which is about $13,000. Now your taxable income is $52,000, which means you will save about $2,500 in taxes from this individual deduction.

If your taxable income falls between or is greater than the range listed above, give ATBS a call and we can help talk you through your options.

4. Consider Getting Taxed as an S-Corporation

shutterstock_683135440.jpgConsider setting your business up as an LLC and filing form 2553 to elect to be taxed as an S-Corporation. There are some advantages to filing a 1120S, as long as you net enough earnings throughout the year. ATBS recommends not making this election unless your net earning is consistently exceeding $70,000-$75,000 per year. At that point, tax savings will be greater than the costs to set up and run the corporation.

As an S-Corp, you can minimize your self-employment tax by paying yourself a reasonable salary and withdrawing additional funds as distributions. Unlike a sole proprietorship, not all income (distributed and undistributed) from an S corporation is subject to self-employment tax. The self-employment tax rate is 15% on all earnings from self-employment activity.

Here is an example of how you can lower your self-employment taxable income when set up as an S-corporation. If you earned $60,000 of net income over the year, and pay yourself a reasonable salary of $40,000, you only have to pay self-employment tax on the $40,000. 15% (the self-employment tax rate) of $40,000 is $6,000. This means that you are now only paying $6,000 of self-employment tax rather than $9,000 (15% of $60,000 is $9,000). Paying yourself a salary that is not considered “reasonable” will immediately send a red flag to the IRS and could potentially trigger an audit.

5. Get Caught Up on Quarterly Tax Estimates

If you have not been paying your quarterly estimated tax payments, it would be a good idea to make a larger than normal 4th quarter tax payment to try and catch up. This will help pay any existing tax liability due when you file your 2018 tax return. It will also allow you to avoid penalties for not paying enough taxes during the year. The 4th quarter estimated tax payment is due January 15th, 2019.

Generally, most taxpayers will avoid a penalty for underpayment of annual tax if they owe less than $1,000 or if they’ve paid at least 90% of the tax due for the current year. However, it is HIGHLY recommended you pay taxes every quarter. Failing to pay your quarterly estimated taxes can result in additional penalties that vary based on how much you owe.

Don’t let yourself get too far behind or it will become more and more difficult to get yourself caught up. ATBS recommends setting aside 25%-30% of your weekly net income for quarterly estimated tax payments.

6. Make an Individual Retirement Account (IRA) Contribution

Contributions that you make towards a traditional IRA are considered tax deductible. You can contribute up to $5,500 per year across all IRA’s in your name and if you are over the age of 50 you can make an additional $1,000 contribution for a total of $6,500 per year. These contributions have to be made before April 15th, 2019.

Additional retirement plans you can contribute to include a simplified employee plan (SEP) or a savings incentive match plan for employees (SIMPLE).

A SEP has special rules attached to it, so if you have employees, make sure you understand the contribution rules.  If you are the only employee of your company, then you can contribute 20% of your net income from self-employment activity, or $55,000; whichever is less.

If you are a single truck owner-operator, or your company has fewer than 10 employees, you can use a SIMPLE IRA. Your annual contributions are capped at $12,500 unless you are 50 and older when it’s increased to $15,000. Find a trusted financial advisor to help you determine which method of investing for retirement is best based on your individual income needs.

It’s recommended that you talk to a tax professional if you need any help with any of the changes resulting from the Tax Cuts and Jobs Act. At ATBS, we specialize in owner-operator truck driver taxes. We can walk you through each scenario above to make sure your 2018 taxes are filed correctly. Give us a call at 866-920-2827 to get started!

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