Trucking & Taxes – October 2022
No one likes to pay taxes. However, there are two sure things in life, death and taxes.
We are all subject to taxes – sales tax, fuel tax, property tax, Social Security, Medicare, or income tax.
The first two taxes are unavoidable. Someone is always collecting these from you when you make the purchase. Property tax is inevitable whether you own property or not. If you own property, you are paying on that property. If you are renting, you are paying as part of your rent.
So that brings us to Social Security, Medicare and income tax. You can do many things to avoid these taxes, but not all are recommended. Some even come back to bite you, because you only think you are avoiding them.
Wrong ways to avoid Social Security, Medicare, or income tax
First option: Don’t file taxes.
We have seen many truckers take this approach, which does not work. Inevitably, the IRS will find you, and it will cost you even more than filing and figuring out how to pay.
That is called a substitute for return. The IRS determines what exemptions you get to claim, and they take zero expenses. This way, you pay the most taxes. This is where it bites you in the end. Don’t take this approach. It does not work, even if it feels that way at first.
We have had to help many truckers who took this approach to get them out of trouble with the IRS and relieve them from their debt. If you know someone who has taken this approach, they should call us today.
Second option: File but make it up until you get to the amount you are willing to pay.
The convenience of tax software or unlicensed professionals makes this easy. Don’t like the amount of tax you’re paying? Change a number and, presto, the taxes are reduced. Yes, this works, but have you heard about audits? Yes, the IRS still audits taxpayers, and the IRS recently hired 87,000 more agents. So, in an audit you bear the burden of proof. You must prove your deductions or expenses. This is not like a trial where the IRS has to prove you were wrong. They assume you are wrong, and you have to prove the expenses and deductions are accurate. The burden of proof is on you.
This approach is not a recommended way to avoid taxes. If you took this approach, let’s get this fixed and do your taxes correctly to avoid additional fines and penalties, including a fraud penalty!
Tax planning: The best and only approved way to lower taxes
Tax planning is the only way to reduce taxes and not get in trouble with the IRS. Tax planning takes many forms, and it is different for each client/taxpayer. There is no cookie-cutter approach. Each year you should have a sit-down with your tax preparer (preferably an enrolled agent or CPA) to review your financial statements.
This review is where planning starts, so good bookkeeping is essential. We compare the current year to the prior year to see what has changed – making more or less? Then the plan will start to take shape.
Making less
Let’s find out why. Are you spending too much or not working enough? Is the cost of fuel up, price per load down? Whatever the reason, let’s find a way to improve the net income. With planning, we can change the estimated tax payments you are making or change payroll if you are an S corporation. Also, when planning, it is an excellent time to check to see if you are making retirement contributions and decide if they are the correct amount.
Making more
When you make more money, this brings many strategies into play for reducing taxes. Here are options that we use to reduce the tax burden. Now, remember not every strategy is right for every taxpayer. We look at every option and cost benefit to determine what is correct for our clients. Don’t forget to also look at your cash flow and household needs before implementing a tax strategy.
Strategic tax planning
Entity structure: When looking for ways to save money, reducing self-employment taxes by using an S corporation or a multiple-member LLC could work in your favor. When using either, make sure you talk with your tax professional to see what impact this will have and what it costs. Using an entity can sometimes significantly reduce the burden of self-employment taxes. However, it does not reduce federal income taxes.
Retirement Plans: You can use many different retirement plans, from the normal IRA to Simplified Employee Pension Plan to the 401(k). Each has different limits and costs. Working with your tax professional and investment broker, we can develop a solid retirement plan for your future. As a trucker or owner-operator, when is the last time someone talked about planning for retirement? We do it every year with our clients because it is essential. There is no guarantee that Social Security will be there or even enough to retire. Plan not just to save taxes but for your future.
Bookkeeping: Yes, bookkeeping is a key to every strategy we employ to save you money. It is the foundation of every strategy in tax planning. If you don’t have good bookkeeping:
- You don’t know how your business as an owner-operator is doing
- You don’t know what expenses you may be missing
- You don’t know that you have accounted for all your income
- You don’t know if you accounted for the fixed asset you bought correctly and if depreciation is calculated correctly.
How can you do tax planning if you don’t know these things and many other items that get accounted for in bookkeeping? Well, you cannot be planning very well.
It may be late in the year, but there is no better time to start your bookkeeping. Whether you do it yourself or hire someone, get started today. Keep it simple:
- Save every receipt
- Open a separate checking account for business
- Use a separate credit card for business expenses
- Save a copy of your ELD
- Get a notebook to carry with you and envelopes for receipts.
If you implement the five items above, it will help to make sure you are accounting for every business expense.
You also need to know what is allowed and what is not by the IRS. Start with what is ordinary and necessary according to the IRS regulations. Your tax professional can help with that.
Ultimately, it all starts with great bookkeeping and knowing your cost of operations. Those two things allow your tax professional to help you determine the correct estimated tax payments, provide an excellent basis for tax planning, and plan for your future. LL
Editor’s note: Once you have your bookkeeping done right, OOIDA provides a cost-per-mile calculation on its website OOIDA.com.
This article has been presented by TruckerTaxTools.com, a division of Taxation Solutions Inc. – Tax Relief. Barry G. Fowler, EA, president of Taxation Solutions, has been providing IRS tax debt resolution and bookkeeping services to the trucking industry for more than 21 years. If you would like a free consultation, contact them at 877-966-2477. The website is TruckerTaxTools.com. This article does not give and is not intended to give specific accounting and/or tax advice as everyone’s tax situation is different. Please consult with an expert at TruckerTaxTools.com, the leader in trucker taxes.