In 1935 the US Court of Appeal heard a case called Gregory vs. Helvering. In the ruling of that case, the judge said, “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.” Over and over again, the Courts have said that there is nothing sinister in so arranging your affairs as to keep taxes as low as possible. There is no public duty to pay more than the law demands.
With that said, let’s tackle your taxes. With tax season now in full swing, many small business owners may find that they aren’t quite ready to dive into their tax paperwork — even though there may be the promise of a great tax return awaiting them. But, here’s what you can do now to get prepped for tackling your taxes.
1. Stay updated about tax reform news. This year’s tax season is already shaping up to have a slightly different tone than previous years, due to the passing of the tax reform bill and its surrounding discussion. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. These rules will begin to apply now for the 2018 tax year, which means they will not affect your current 2017 tax returns. Throughout the rest of 2018, it will be key for entrepreneurs to continue following tax reform news from reliable media sources. This will allow small business owners to better understand the changes within America’s complex tax system.
2. Get organized. Mark down key filing dates like estimated tax payments, sales tax deadlines, and when tax season is slated to officially begin. From 1099s to W-2s to receipts, designate a spot to store all of your necessary tax papers. If you got married, divorced, or had a child in the last year, be sure to change your filing status. Determine how you will prepare and file your taxes, either with a software program or a tax preparer – or both.
3. Determine which deductions your business can claim. There’s plenty a small business can claim as a deduction on their taxes, including the cost of renting space, salaries and wages, and insurance, just to name a few. The 276 business deductions extend to entrepreneurs that work from home too, such as home office, travel and even meals. Take time to ensure you’re not missing out on any lesser-known deductions, like health insurance and start-up costs (applicable for those that started a business this year).
4. Contribute to your retirement fund. Do you have a Roth or Traditional IRA fund? How about a retirement account? Use this time to add as much money as you can to these accounts.
5. Figure out if you will need an extension. It’s never too early to determine if your business needs a tax extension. If you know that you won’t be able to file on time, look into requesting an extension as quickly as possible.
6. Join an Association. In addition to safety compliance and discounted programs available through a professional association (like NTA), the latest Trump administration changes let millions of small businesses and the self-employed buy health insurance that is EXEMPT from some of the Affordable Care Act’s requirements. Members of qualified programs would no longer have to comply with an ACA rule that they offer a mandatory array of benefits. NTA now offers two such qualified ACA-compliant programs, starting as low as $62 per month (call 562-279-0557).
The new tax laws will also compel many trucking companies to analyze how to adjust their business model. From large carriers to single-truck outfits, many in the industry are figuring out how the federal “Tax Cuts and Jobs Act” will impact their income and are formulating strategies to adapt to the new rules — including the possibility of restructuring their companies altogether.
In general, there are three types of entities: a ‘C’ corporation, which is the traditional structure of companies traded on the stock market or otherwise; an ‘S’ corporation, where income is passed through to the partners (typically used in family-owned businesses, Limited Liability Partnerships and Limited Liability Companies); and sole proprietors, such as an owner-operator with one truck.
For ‘C’ corporations, the tax bill lowers the federal income tax rate from as high as 35% to 21%. For the ‘S’ corporations, accountants will calculate 50% of W-2 wages, 20% of taxable income and 25% of W-2 wages plus 2.5% of all qualified property, and then apply the lowest of the three totals. Accountants believe the 20% deduction on taxable income will be common with the asset-based carriers employing drivers, dropping the highest tax bracket from 37% to 29.6%. But, even though the ‘C’ corporation tax rate is lower, there is double taxation. When a company pays a salary, the person pays a tax, and when a ‘C’ corporation issues a dividend, the person is taxed again. Salaries in an ‘S’ corporation normally aren’t taxable. For the owner-operator, the conversation is whether to remain a sole proprietor or become an ‘S’ corporation or an LLC. Some small unincorporated fleets are also examining the “pass-through” income structure.
Sean McCoy, a CPA in Scottsdale, AZ, and also a service firm that works with the NTA and their owner-operator members, said that one major drawback to being a sole proprietor is that profits are subject to both an income tax and a 15.3% self-employment tax for Medicare and Social Security. As a pass-through corporation, there are methods to lower the liability. However, the IRS requires people in this type of corporation to receive reasonable pay. The IRS is going to want to see a salary roughly equal to a company driver – about $40,000 to $45,000. So, if an owner-operator is only netting $50,000 in profit and paying $45,000 in salary, there isn’t enough savings to cover the cost and hassle of being a corporation. But, if you’re paying tax on $65,000 or more, then it makes sense to become an ‘S’ corporation.
For company drivers, a big change is that they will no longer be able to deduct miscellaneous expenses on their Schedule A tax forms. For owner-operators filing a Schedule C, these deductions will remain in place. Company drivers may want to place a greater emphasis on per-diem pay to offset losing miscellaneous expenses. Currently pegged at $63 per day, a driver working 300 days could receive $18,900 in tax-free per diem. By paying per diem as part of a driver’s wage, the driver will pay less taxes.
Carriers will also have to adapt to new rules on purchasing trucks. Like-kind exchanges, also known as 1031 exchanges, were eliminated (except for real estate). Carriers often used the provision to delay paying taxes on the sale of a truck. Instead, the legislators raised the “bonus” depreciation expense from 50% to 100% through 2022, allowing a carrier to write-off the full value of a new or used truck immediately, rather than over a three-year period. This is good in the short term, but may not be good in the long run, when the bonus depreciation sunsets.
