NOTE: This article is for education and reference purposes only. You should always consult a tax professional to discuss your specific situation and finances.
It is nearly that time again – time to reflect on the year behind us, take inventory of our wins and losses, and plan for a bigger and better year ahead. No, we’re not talking about New Year’s Eve. We’re talking about tax season. For owner-operators, this means navigating ever-changing tax regulations, sifting through piles of receipts and repair documents, and running calculations for numerous tax forms. In this article, we provide some helpful information for truck driver taxes, deductions, truck depreciation, and tips for minimizing taxes.
Types of Taxes
- Self-employment taxes: Think of these as the Social Security and Medicare taxes that are deducted if you are employed by a company. As an owner-operator, you are responsible for paying these directly to the IRS – currently estimated at a rate of 15.3% (12.4% for Social Security and 2.9% for Medicare). Review full requirements at IRS.gov.
- Income taxes: As an employee, these are the Federal and State taxes that are estimated and withheld from your paychecks based on W-2 deduction filings. As an owner-operator, you are responsible for estimation and payment of these taxes independently. Online resources like Tax-Brackets.org provide current rates for both Federal and State income taxes.
Estimated Tax Payments
Estimated tax is the method used to pay tax on income that isn’t subject to withholding (for example, earnings from self-employment). In most cases, anyone who expects to owe at least $1,000 in taxes after subtracting withholding and credits is required to make quarterly payments for self-employment and income taxes. IRS Form 1040-ES includes an Estimated Tax Worksheet as well as quarterly due dates and payment options.
Trucker tax tip: consider making estimated tax payments monthly. In addition to avoiding large quarterly payments, this also provides a better pulse on your overall income and the health of your finances!
Recordkeeping: Tracking expenses and income
When it comes to trucking business taxes, maintaining diligent and accurate records of both income and expenses is essential. The best practice for recordkeeping is to track in real time, rather than relying on memory to log items later. This method also minimizes the likelihood of forgetting items and missing out on legitimate deductions.
Additional tips for managing records include:
- Keep receipts for all expenses. You cannot take deductions for expenses if you do not have a record of them. This could result in paying higher taxes than necessary.
- Maintain a detailed expense log to track all business costs, including any that are billed automatically like tolls or scale tickets. You’ll be glad you kept this when you are working on your taxes. You can even use your phone or tablet to easily keep track regardless of where you are. Consult any financial or trucking software or apps you may be using. They may automatically track certain expenses or at least help you get the most out of them with some tweaking.
- Trucker Pro Tip: Have a credit card that is strictly used for business expenses. This makes tracking owner-operator tax write-offs much easier. Like all credit cards, paying down your balance will keep your finances on track while also building credit for your business.
Tax Deductions for Owner-Operators & Truck Drivers
Tax rules for truck drivers allow many daily, necessary expenses to be deducted from overall tax liability. Knowing which expenses can be deducted (and which can’t) helps to ensure that you are not overpaying taxes.
Some deductible expenses include:
- Truck lease
- Permits and license fees
- Repairs and accessories
- Fuel and fuel-tax
- Start-up costs
- Interest paid on business loans
- Accounting services
- Depreciable property
- Insurance premiums
- DOT physical costs
- Retirement plans
- Cleaning and office supplies
- Protective equipment (steel-toed boots, safety vests, gloves, etc.)
- Business travel
- Personal vehicle miles for business-related trips (such as the bank, a meeting, a truck show, etc.)
- Communication equipment (including CB radios, ELDs, and cell phones)
- Per diem
What about Trucker Per Diem?
Per diem is one of the largest deductions for owner-operators, and it is the amount the IRS assumes a truck driver spends when away from home on overnight trips. It accounts for meals and other incidental expenses and is preferred by most over-the-road drivers because it is easier than tracking meal expenses. The current per diem rate is 80% of a $69 per day allowance and ¾ of that amount for partial days (the day you leave and the day you return).
Per diem deductions are filed on the Schedule C form and can substantially reduce owner-operator taxes. Remember, per diem deductions can only be made when you are away from home overnight. E-logs have become a common way for drivers to track their nights away, so use the technology to help you keep accurate records. And don’t forget to keep receipts for any meals and expenses on day trips that don’t require you to be gone overnight!
The Inflation Reduction Act of 2022 and its Effect on Your Taxes
What is the Inflation Reduction Act of 2022
Signed into law on Aug. 16, 2022, The Inflation Reduction Act of 2022 (IRA) funneled new federal spending into efforts to reduce carbon emissions, funding the Internal Revenue Service (IRS), improving taxpayer compliance and lowering healthcare costs.
Though there wasn’t a material change to the average owner operator’s daily operations, there were some potential tax savings to keep in mind when filing in 2023.
IRS Tax Compliance
The government plans to invest $80 billion into the IRS over the next 9 years, using more than half of the investment to hire 87,000 IRS agents. This means it’s more important than ever to file your taxes on time as they plan to highly enforce collections, criminal investigations and legal support.
Health Insurance Subsidies
Though the subsidies offered through the Affordable Care Act were set to expire in 2023, through the IRA, they will be offered through 2025. Owner-Operators who obtained their health insurance through the Federal marketplace — and plan to continue — qualify for a subsidy. Note: Your tax credit is based on the income you provided during the application process.
What Owner-Operator Expenses are Not Deductible?
While many daily expenses can be legitimately deducted from a trucker’s income tax, it is important to know which expenses do not qualify for deduction. Those include:
- Expenses reimbursed by an employer
- Everyday clothing
- Home phone lines
- Commuting costs and deadhead miles
- Personal vacations
- Interest on personal loans
- Downtime expenses
Tax Benefits of Lease vs. Purchase
One of the most common questions owner-operators have about taxes is whether to purchase or lease their equipment. There are benefits to both from a tax perspective, but much depends on a driver’s business goals and preferences. In order to determine which option is best for you, it is important to understand the basics of depreciation (for purchased/owned equipment) and monthly payment deduction (for leased equipment).
Depreciation is a deduction for owned property that is used in service and is an allowance for wear, tear and deterioration over time. For truck drivers this includes any owned trucks and trailers, which follow specific depreciation schedules. Class 8 trucks generally on a three-year schedule and trailers on a five-year, with a percentage of depreciation deducted each year as determined by various formulas. The IRS has provided Publication 946 to help with specifics on depreciation calculations but it is recommended to consult a tax professional or small-business consultant for clarification on current allowances.
Leased equipment does not qualify for depreciation deductions, but drivers can deduct the entire amount of each month’s payment on leases. What this typically means is that purchased equipment will provide higher deductions through depreciation for the first two years, but very little (if any) depreciation by year four. Deductions for leased equipment may be smaller in early years, but will continue over the life of the lease – making it a desirable option for drivers who prefer to trade in equipment every three years.
If you are considering purchasing or leasing new equipment in the coming tax year, it is important to consult with qualified tax professionals and trusted financial partners like Triumph (formerly Triumph Business Capital) to keep your business goals in line and on track.
Tips for Minimizing Truck Driver Taxes
Tax preparation for owner-operators can be time-consuming and complicated, but there are steps you can take year-round to maximize deductions and minimize taxes.
Get Financially Healthy with a Trucking-Focused Finance Partner
- Purchase necessary items and supplies at the end of the year. If you are concerned about a large tax burden in the coming year, consider spending some money on business essentials. As a business owner, you always need access to supplies. This can be a good way to lower your tax bracket and prepare for the year ahead. Think of necessities like prepaid tires, prepaid insurance, or office supplies.
- Be prepared for an audit. It is estimated that 4% of tax returns filed by self-employed professionals with more than $100,00 in revenue get flagged for review. With that in mind, keep good records! Having thorough documentation is the easiest way to safeguard yourself from a painful IRS audit.
- Hire a tax professional. Navigating the nuances of small business tax filings is tedious and full of potential issues. Rather than risk missing a substantial deduction or making a calculation error, let a certified tax specialist sweat the details. Not only will it save you a massive headache, it could prevent an audit.
- Stay in-the-know regarding your finances. Having a comprehensive view of income and cash flow is critical to maximizing your annual profits and minimizing taxes.
As a self-employed owner-operator, you know the importance of building trusted relationships. Brokers turn to you for reliable transportation services, and you expect reliable payments in return. Unfortunately, keeping up with invoices and chasing payments from customers can quickly snowball into a massive burden and negatively impact your ability to focus on growth.
Triumph has helped thousands of clients take control of their finances and improve cash flow, offering a full suite of solutions for owner-operators. Think of Triumph as an extension of your business, providing invoice factoring, back-office support, equipment financing, and truck insurance. These services create a streamlined and easy process for managing finances throughout the year and help ease the pressures of tax season.