Rigbooks recently talked to David Dilley, who’s been a CPA for more than 16 years and who specializes in trucking accounting and taxes. The following article is based on our talk with him. This is the first article in a series on tax issues and tips for owner-operators and small trucking companies.
One of the most common and biggest mistakes owner-operators make is just being disorganized. They don’t make an effort to record and save every single work-related expenditure and they don’t save all their receipts.
Why are receipts important? For one thing: if you are audited, the IRS will request receipts to prove your tax filing and expenditures are accurate.
The other reason receipts are important is that they help you remember all the things you paid for. Without them, you might not be deducting as many expenses as you should.
“A lot of truckers maybe don’t sweat the small things,” says Dilley. “They’ll get a $5 receipt at a truck stop and leave it on the dashboard and it blows out the window. Or maybe they just throw away the small receipts. But all those little things can add up.” (Click here for an article about how small savings in expenditures can lead to big gains in profit.)
Another common problem is just throwing all the receipts into one container and not keeping them separated by types of expense. This turns into a pain later, because either the owner-operator will have to spend time organizing them (and time is money), or they’ll have to pay their accountant to spend time going through them.
At the very minimum, truck drivers could have an expanding file organizer (or something similar) in the cab of their truck. The file should be organized by related categories of purchase, like Fuel, Food, Maintenance, Lodging, Tolls, etc. Whenever they get a receipt, they can just spend a few seconds putting that receipt away. Spending that time may feel like a bit of a pain in the moment, but it saves a lot of time and money and frustration later.
He also recommends having a calendar in the cab where they can keep track of on-the-road days and home days. It can be as simple as just putting a red X on the calendar for Away days and a black X for Home days. This will let you more easily figure out things like Per Diem write-offs later or estimate fuel expenditures if that is needed.
To take the next step beyond a paper file system, there is dedicated trucking business software (like Rigbooks). Trucking software can help you track every aspect of your business, and making things easier and cheaper at tax time is just one benefit of this.
Know what you can write off (and what you can’t)
Some owner-operators and small business owners don’t know what can be written off and what can’t.
Not knowing what they can write off leads to obvious issues. If you are doing your own taxes, you are missing out on saving money. If you’re hiring a professional to do your taxes, even if you find out about those write-offs later, you won’t have those receipts and will have to estimate those expenses. (David has a list of relevant write-offs on his site here.)
Writing off things you shouldn’t write-off can lead to other problems, like an IRS audit. In his close to 20 years in business, David has many stories of clients being mistaken about write-offs. He had one client who insisted that he was allowed to write off all of his clothes purchases, including his underwear, because, as he put it: “If they’re not going to let me drive my truck naked, then my clothes are a cost of my business.” (And no, this guy wasn’t kidding.)
But the IRS has very specific standards about business write-offs; they have to be deemed “ordinary and necessary.” This means that the expense is both ‘ordinary’ for the industry and ‘necessary’ to conduct the business. Unless clothes are trade-specific (like steel-toed boots or logoed clothes), they can be used for other non-work purposes and wouldn’t be considered an acceptable write-off.
Food expenses is another area that is not well-understood. If a trucker falls under DOT regulations (which most owner-operators do), they can write off 80% of their away-from-home food expenses (non-DOT-regulated drivers write off 50%). The per-diem food allowance is $59/day. If you have adequate proof that you were on the road and not in a situation to eat at home, you can write off 80% of that $59/day. This applies whether you have meal receipts or not. (But you will need some way to prove that you were on the road: meal receipts, fuel receipts, and lodging receipts all help prove that). These regulations can seem complex to owner-operators but are actually pretty simple once you understand them.
Understanding tax choices and planning ahead
David sometimes sees owner-operators and small business owners who are caught by surprise by their taxes owed changing from year to year.
For business owners who have purchased new trucks, write-offs involving truck depreciation and interest payments are common sources of confusion. There are a few ways these can lead to confusion, including these scenarios:
- For truckers who have started a multi-year depreciation schedule, the write-offs drop over each year in the schedule. So, to give one example, an owner-operator might be writing off 50% of the value of their truck the first year, then 45%, then 35%. (These are just random numbers to illustrate the concept; in actuality, how an owner-operator sets up a depreciation schedule can vary widely.) If the owner-operator doesn’t understand this, he might be caught by surprise when taxes owed go up considerably.
- Interest payments can be written off. Truck owners making payments pay less and less in interest over time and more and more to the principal. This means that the write-off amount drops over a few years. Again, truck owners might be taken off-guard by this if not prepared for it.
David has seen this be an issue when owner-operators came to him after having their taxes done previously by someone else, and that preparer didn’t properly explain the impact of the decisions they made. David has had an owner-operator’s wife crying in his office, because they were caught so unaware by changes in the amounts they owed. This is why he tries his best to explain the reasons behind his tax preparation to his clients; “I don’t need to make them into tax accountants, but if I can help them understand the long-term effects of their tax choices, then they won’t be surprised by anything.”
Hire a professional
David believes it’s always a good idea to get a professional to prepare your taxes. This is especially true for owner-operators and small business owners just starting out. In those cases, they should get tax consultation before doing any work on their own. Tax professionals should be consulted for business-structure advice, as should insurance professionals and business lawyers.
Hiring someone to do your taxes is no guarantee that your tax return will be perfect or keep you out of trouble. David has seen many tax returns prepared by supposed professionals that were full of mistakes and straight-out lies. He witnessed one tax return where the tax preparer written off a recreational boat expense as part of the business. He saw another one where the preparer had seemingly just added a ‘1’ to the amount being written off, so instead of $7,000, they were now claiming $17,000.
You must do your due diligence and make sure that the person doing your taxes is reputable. As David says, sometimes it’s tempting to believe that someone telling you what you want to hear is right, but it doesn’t always work like that. And you will be the one being audited even if it was your tax preparer’s creative accounting that got you into hot water. David recommends hiring CPAs, because they have pledged, as part of earning their title, to adhere to ethical principles.
You can be audited even if you tell the truth
Telling the truth is no guarantee that you won’t be audited. Sometimes it happens. So don’t panic if you are audited and you are confident that your filing was accurate.
David Dilley had one client who said that he was on the road 350 days in one year (a year is 365 days). So he was writing off 80% of the per diem for almost the entire year. This is a lot of per-diems to write off, but at the same time the guy was single, had no family, had no home, worked all the time driving, and just dropped in at his parents’ house a few times a year, so his claim was probably true. Not surprisingly, though, he was audited, probably because of the amount of per-diems claimed. He did, however, end up getting through his audit with no problems; the IRS decided he was on the up-and-up.
Be aware that some things that seem unusual are more likely to be flagged and trigger an audit, no matter if they are true or not.
Hopefully this article has given you some helpful tips and advice for preparing and filing taxes for your trucking business. Our next article will look at some advice for what to do when you run into problems with the IRS after filing.
If you have any questions about this article or want to learn more about how our software, Rigbooks, can help you with improving your fuel efficiency, send us a message on our Contact Page.
About David Dilley
We interviewed David Dilley, CPA, for this article. David is based in Jackson, Ohio and is the owner of the website TruckersTaxReturns.com. David graduated from Ohio University in 1995 with a Bachelor of Business Administration with majors in accounting and small business entrepreneurship. He became a CPA in 1999 and is a member of the American Institute of CPAs. He worked as an accountant and auditor for other CPA firms before going to work for a local transportation company in 2002. David launched his own CPA firm in September, 2008 and focuses on helping owner operators and small- to medium-size trucking companies lower their tax burdens.
My name is Jason Forrest, and I’m the creator of Rigbooks. Rigbooks is a cloud-based software that makes it easier for small and medium-sized trucking companies run their business while keeping organized. We’ve been around since 2010.
A little about me: I grew up in a trucking family and from an early age I learned about the day-to-day problems that truck owner/operators have to deal with. I was into computers and programming as a kid so over the years I helped write small computer programs that helped my parents run their company better. Eventually that led to the idea of putting all those tools together in one package. And Rigbooks was born.
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More resources for trucking business owners:
- What’s the difference between HVUT, Form 2290, and IFTA?
- "How long do I have to keep these?": FMCSA record retention for owner-operators and small fleet owners
- Top tax filing tips for owner-operators
- Tips for owner-operators with tax problems
- How are fuel surcharges calculated?
- Simple rules for maintaining long-term profitability in your trucking business
- Starting out with an owner-operator trucking business
- Owner-operator expenses: Fixed costs vs variable costs
- Understanding owner-operator expenses and costs
- Gaining half an MPG can put more money in your pocket than adding $90,000 in revenue
- Cutting fuel costs and improving fuel efficiency for Owner Operators
- Top truck-buying tips for owner-operators
- New versus used truck pros and cons table
- Buying a truck: Should you get a new or used rig?
- Preventative maintenance strategies to avoid major repair costs
- IFTA fuel-buying strategies: Where is the best place to buy fuel?
- Calculating your cost per mile
- Owner Operator Expenses - Fixed Costs vs Variable Costs
- How do I calculate IFTA?
- How does IFTA work?
- How did IFTA start?
- What exactly is IFTA?
- Tracking miles for IFTA
- Fitness for the road
- Acronym cheatsheet for the trucking industry