A Quick Guide to Owner Operator Tax Deductions
To be successful, you need to understand how to calculate and pay taxes to state and federal agencies yourself.
Being aware of owner operator tax deductions, combined with good planning and record-keeping throughout the year, helps you avoid any big surprises during tax season.
In this guide, you’ll learn how to save time and money on your trucking business taxes.
Note: This article is for general purposes only and not a comprehensive guide on tax deductions. For official tax guidelines, refer to IRS regulations and consult with a tax professional.
Types of Taxes
Owner-operators should be aware of the types of taxes that apply to them and how they operator their business.
- Self-employment taxes: These taxes are like the Social Security and Medicare taxes paid as a company employee. According to IRS.gov, the self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare).
- Federal and state income tax: As an owner operator, you are responsible for estimating and paying federal and state income tax.
Estimated Tax Payments
If you think you’ll owe at least $1,000 after subtracting withholding and credits, you must make estimated quarterly payments of self-employment and income taxes. These are often made in the range of 20-30% of the net income you earn over the quarter to avoid incurring a tax penalty.
The IRS allows you to estimate your taxes for the year based on the prior year’s data. However, accounting firms such as ATBS use current data to estimate taxes due.
Typical Tax Deductions for Owner-Operators
Common deductions include:
- Interest paid on business loans
- Depreciable property
- Home office
- Insurance premiums
- Retirement plans
- Startup costs
- Permits and license fees
- Truck lease
- Accounting services
- Communication equipment
- Truck repairs and accessories
Common tax myths — BUSTED!
“In the year you start your business, you will owe no tax.”
This is not true, especially if you’re leasing your truck.
“You can deduct deadhead mileage and days off because of illness.”
The IRS already deducts deadhead miles and time off. Don’t deduct these again.
“You can deduct the cost of your dog.”
Your dog is generally deductible as a security measure as long as they’re part of the trucking operation and always with the truck.
“You must file your business as corporation.”
Not necessarily. Incorporation only makes sense when the tax savings exceed the added costs.
“You can negotiate a deal with the IRS to pay back taxes at a few cents on the dollar.”
The IRS may grant “Offers in Compromise” only under specific circumstances.
Owner operator tax deductions and record-keeping
If you don’t file a tax return or show any owner operator deductions, the IRS will determine your taxes due without considering any potential owner operator tax deductions. Remember, this amount will probably be higher than you would have paid.
Use this profit equation to estimate your tax deductions:
GROSS PAY (as reported on 1099-MISC) – ALLOWABLE BUSINESS EXPENSES = NET PROFIT
How to track your business expenses
The best protection from audits and penalties is good record-keeping.
- Keep all records that support every deduction you claim on your tax return, beginning with your logging system for per diem deductions.
- Save and label expense receipts and maintain an expense log. Don’t forget to collect receipts for lumber fees or other business expenses charged to your credit card. This includes tolls, weigh station fees, and credit-card fees. Many owner operators have two credit cards — one for business and another for personal use — to better track their spending.
- When buying equipment and supplies for your business, try not to overspend. You can only write off a portion of those expenses on your taxes.
Per Diem Expenses
The per diem (per day) expenses are the tax-deductible amount the IRS assumes you spend on meals, beverages, and tips while you’re away from home for work.
Owner operators deduct per diem expenses on IRS Schedule C, which reduces the self-employment taxes and income taxes owed on the return. An over-the-road trucker away from home much of the year can save money using the per diem allowance.
Even if you use the per diem allowance, keeping all receipts and travel documentation for at least three years is good practice.
It’s also important to realize that you can’t deduct your total per diem from your tax bill, dollar-for-dollar.
The IRS allows you to take 80% of the per diem as a deduction on your taxes. These amounts and laws may change yearly, so make sure you’re familiar with current IRS regulations.
Section 179 allows taxpayers to deduct certain property as an expense if they use that property in service. This applies to your truck.
“Straight-line” depreciation is the standard depreciation schedule for a new Class 8 truck. The IRS spreads this deduction evenly over several tax years.
You should also consider a variation of the multi-year formula known as accelerated depreciation, which take a percentage of the equipment’s value in a couple of years and then a lesser rate afterwards.
Truck owners and renters may be able to deduct vehicle costs from their taxes, such as:
- Fuel expenses
You may have to depreciate some expenses, depending on the nature and cost.
See IRS Publication 946: How to Depreciate Property for more information.
Minimizing Your Taxes
Here are some tips to reduce your taxes:
- Get help from a tax professional or business services provider specializing in owner operator businesses.
- Save money tax-free by regularly contributing to an IRA, SEP, or 401(k). A portion of your contributions are tax-exempt until you start drawing on them many years later.
- Track personal vehicle miles. Commuting to and from work isn’t an allowable business expense. However, if you drive for work-related errands such as going to the bank, meetings, or truck shows, you can deduct the mileage.
- You can receive tax credits for paying tuition—for yourself or your children—at a qualified educational institutions.
The risk of an audit increases for self-employed taxpayers earning at least $100,000 per year.
Claiming substantial expenses not common to a single-truck owner operator might trigger an audit. The IRS typically has three years to request an audit for any deductions or taxable income stated on your tax return. So you should keep your records for at least that long.
Remember, the fact that the IRS is auditing your return doesn’t mean that your CPA made a mistake. The IRS randomly selects some returns to determine compliance with tax rules.
If you receive an audit notice contact the person who prepared your return. Most auditing of the self-employed involves verifying expenses.
Make tax deductions work for you
Taxes don’t have to be a struggle for owner operators.
The key to success is maintaining good records and accounting for owner operator deductions all year long. If you need more detailed tax guidance, you can also refer to the Trucking Tax Center at the IRS.
If you’re looking to save time and money, automate the processes within your business with a Transportation Management System (TMS). Truckstop’s TMS is an affordable way to streamline and optimize your business while saving you time and money.