It has always been important for owner-operators and drivers to have a tax preparer that understands the trucking industry (most don’t). Now it is absolutely critical to make sure your tax preparer knows the trucking industry and is up to speed on the new tax laws.
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Owner-operators:
***Nothing changes with per diem
*** Get to deduct 20% of business profit before paying taxes, includes sole proprietor, LLC, S-Corp, and Partnerships.
Company Driver:
Cannot deduct per diem, but carriers could pay per diem, giving the employee the benefit of tax-free per diem, PLUS the new higher standard deduction.
The biggest tax law change in our life has passed. It did not really simplify the tax code, it’s as confusing as it always has been and will cause more confusion until the new rules and forms are released from the IRS. You are going to hear a lot of conflicting reports about what has changed and what is allowed because it is difficult to interpret tax rules from a legislative bill. For many people, the one thing that has been simplified is filling out and filing your personal tax return. If you are an employee with less than $12,000 of itemized deductions or married with less than $24,000 of itemized deductions, your tax return will be less than 1 page. There are very few itemized deductions left. If you have a large mortgage, charitable contributions, and high real estate taxes you may be able to itemize, but most won’t.
I’m going to address this issue from the perspective of people in the trucking industry, employee drivers and owner-operators, both independent and leased to a carrier (including lease-purchase).
The good news is, that almost everyone driving a truck in any category will see a lower tax bill next year. The short-term bad news is, this is going to cause massive confusion for a while. I need to dig through 1000 pages of text to try and figure this out.
The biggest issue causing confusion in the trucking industry is the per diem rule.
There are several possibilities here. Let's start with Owner Operators (independent or leased) NOTHING changed about per diem. You will still deduct it as part of your business expense on your schedule C or corporate return.
The confusion is whether or not a company driver can deduct it as a schedule A (Unreimbursed employee expense). Here is the text of the bill that I believe eliminates the ability for an employee driver to “deduct per diem on their tax return.
“Under the provision, business expenses incurred by an employee are not deductible, other than expenses that are deductible in determining adjusted gross income (that is, above-the-line deductions). “
This may sound like bad news and for some drivers, it will have a large negative impact on their tax bill. BUT, if the industry adjusts, this could create a win-win for drivers and carriers.The answer will be for the carrier to "PAY" the per diem as a tax-free reimbursement, many carriers already offer this. That way the driver gets their per diem pay tax-free and still gets the higher standard deduction.
Here is an example of how that could work:
Under the current tax law a driver who is away from home for 300 days per year would be eligible for about $15,000 in per diem ($63/ day times 300 days adjusted to 80% = $15,120) as an itemized deduction, but that also means they do not take the standard deduction of $12,000 (married) or $6,000 (single). That means they would receive $15,120 as “tax-free” income.
Now let's look at a scenario under the new tax law:
The carrier can pay 100% of the allowable per diem to the driver as a tax-free reimbursement. 300 days times $63/day is $18,900 tax-free to the employee, the carrier can deduct 80% of that amount ($15,120).
The driver will still get the new higher standard deduction of $24,000 (married) and $12,000 (single). That means the driver will now receive, $42,900 tax-free.
In order to make a fair comparison to the current law, you would also have to figure in the elimination of the personal exemption. This gets confusing because it depends on how many dependents you have. Some of that will be offset for some families because the child tax credit has also been increased, as well as the income limits to receive the credit, BUT, this looks like it could be a huge tax break for drivers whose carrier will reimburse the per diem.
There is another change that will make it critically important for all owner-operators, independent or leased to work with a tax preparer who understands the trucking industry AND this new tax law.
Pass-through taxation has been one of the most contentious and confusing parts of the debate surrounding the Republican tax bill businesses — sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations — are not themselves subject to federal taxation the way traditional corporations are. Instead, the income earned from these operations is passed through on the owner's personal income tax filing.
For tax years after 2017 and before 2026, individuals would be allowed to deduct 20% of "qualified business income" from a partnership, S corporation, or sole proprietorships. This means owner-operators will receive the first 20% of their business profit tax-free.
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