For owner-operators, the beginning of a new year is more than a time to celebrate. It’s a time to start thinking about taxes. Even though the IRS says you don’t have to complete them until the April deadline, now’s the time to take action. Doing so can save you money—and also prevent headaches later on.
Trucker tax relief: Make tax deductions a top priority
While what can and can’t be counted as legitimate business expenses can be difficult to discern and may require the advice of a tax advisor, here are some common deductions available to truckers who own and operate their own vehicle:
• Fuel. Typically a driver’s largest expense, fuel can also be your largest deduction, sometimes resulting in thousands of dollars in tax savings each year.
• Tolls and other fees. Road and bridge tolls you are required to pay along your routes are tax deductible, as are scale fees, licensing fees, parking and other expenses required to operate. However, you can’t deduct traffic tickets or any attorney fees you pay to fight such tickets. Many owner-operators have tried, only to be told by the IRS to pay up. In some cases, the IRS may even assess fees and penalties.
• Repairs, maintenance and supplies. Vehicle repairs, parts and maintenance are tax deductible, as are miscellaneous supplies such as window cleaner, paper towels, air freshener, maps, pens, log books and other items you buy specifically to use in your vehicle. However, keep in mind that not all expenses may be considered legitimate by the IRS: For instance, ergonomic improvements to your cab are deductible, but custom décor in the colors of your favorite football team are not. When in doubt, don’t claim questionable items as you may find yourself faced with stiff penalties.
• Mobile phones and computers. Cell phones, smartphones, laptops and tablet computers have become driver necessities. In fact, according to a uShip survey of more than 6,000 owner-operators, 20% would be willing to give up their CB radios to keep their phones—and 16% said they’d even be willing to give up their spouses. While the IRS doesn’t require you to make a choice, it does limit the amount of your deduction: because the government is of the opinion that these items are used for personal reasons as well, you can only deduct half of their cost.
• Depreciation. If you’re like most owner-operators, you can depreciate the value of your tractor and trailer over the course of several years. The amount you can depreciate each year depends on how much you paid for the equipment. You can also deduct the interest you pay on the equipment. However, keep in mind that when you sell the equipment, you must count the money you receive as income because you have already received a tax deduction for the depreciation.
• Meals and daily living expenses. What you eat and drink on the road is an important tax deduction, and you don’t even need to save your receipts because the government gives you a per diem rate. All you have to do is take the number of days you spend on the road and multiply by the per diem rate, which for 2011 is 80% of $59 per day in the U.S. and 80% of $65 per day in Canada. For more information on per diem rates, check the website for the Owner-Operators Independent Drivers Association. Showers and other daily living expenses incurred while on the road may also be deducted.
• Retirement contributions. Another great way to save on your taxes is by setting up a tax-free retirement account such as a SEP IRA or 401(k). Each comes with different requirements and are more tax advantageous than regular IRAs because they allow for larger contributions. They can easily be set up at your bank or at a brokerage house such E*TRADE.
Because tax laws are complex and deductions change annually, it’s a good idea to consult a tax professional to ensure compliancy, accuracy and certainty that all opportunities to reduce tax liability are considered.
Turbo Tax is another useful application if you choose to tackle your taxes on your own.
Most importantly, keeping accurate and organized records is critical. This is an ongoing task that will require your attention throughout the year, but will pay off with a successful and stress-free tax season in the long run.
If you’re having trouble getting started on your tax return, check back soon to find tips to make filing your taxes easier. This is a post you won’t want to miss!