How will the recent sweeping federal tax changes affect truckers — owner-operators and company drivers — as well as the carriers themselves as they file taxes this year?
When President Trump signed the Tax Cuts and Jobs Act of 2017, some criticized that the law's changes would be good for those in higher tax brackets and corporations at the expense of the middle class and lower-level wage earners.
We asked Colton Lawrence, owner and president of Equinox Business Solutions, to help make sense of the tax law for 2019, and explain how it affects those distinct three groups:
—Drivers employed by carriers (so-called W-2 drivers), and
While everyone's specific situation is different, Lawrence offered these overall observations from his company's 15 years of tax preparation and consultation to the trucking industry. From what he's seen, he said the tax law has generally been a help to owner-operators; a potential hit for W-2 drivers (especially for joint-filing driver teams), and a sizeable drop in corporate tax rate for carriers.
Here's his advice and tips for each of the three groups.
In general, Lawrence said, O-Os get a break.
As of Oct. 1 last year, these drivers' per-diem increased from $63 a day to $66 a day, he explained, and it's about $5 higher for trips to Mexico and Canada. "That change alone, over the course of a full year, will reduce their tax liability by about $200 to $300," Lawrence noted.
"The other big change is a concept known as 'QBI,' or qualified business income," he added. Most owner-operators are "pass-through entities," he said, which is anything other than a Class C corporation such as sole proprietor, LLC, S corporation or partnership.
"There's a lot of complex computations that go into this, but for most truck drivers — where this is the only business they have — it's really a pretty simple calculation," Lawrence noted. "They get an additional 20% deduction on top of their already-calculated business deductions."
"They take fuel, per-diem, maintenance and repairs, and all the other things that go into calculating their net income on the business, and then they get an additional 20%," he added. "It's a big help to them."
However, he also pointed out that 2018 was a banner year for most of his owner-operator clients; they made a lot more money than in past years, and some didn't prepare for the windfall — or the taxes they could end up owing.
"Although their tax liability is down, they made more money. Some are finding themselves in situations where they owe more than they were expecting because they didn't pay enough on their quarterly tax estimates," Lawrence said.
He added he's found that some O-O's were not diligent in making their quarterly tax payments and may end up with a high tax bill, penalties, or even worse.
"My number-one suggestion is to make sure they are setting aside enough money to cover their tax liability, because I, unfortunately, see this [high tax liability] as a way for an O-O's business to fail," he said. That is, an owner-operator could have overspent and be left with an unexpectedly high tax bill they can't pay — even enough to threaten the business.
II. W-2 drivers
For drivers employed by a carrier, "the biggest change is that the per-diem has gone away," Lawrence said. W-2 drivers used to be able to deduct the cost of work-related expenses ranging from mobile phones to work gloves to soap used for showering on the road.
"They are no longer able to do that," he noted, "and it's impacting all company drivers in differing degrees."
The average driver on the road about 300 days a year could often find up to about $15,000 a year in such deductions. This has been replaced by a $12,000 personal exemption. "If you average all of that out for company drivers, we're seeing tax liability go up by somewhere between $600 and $1,000," Lawrence said.
For team drivers, he said the impact can be greater.
"If you have a team, like a husband-wife team, filing jointly, that is causing a real big impact on them — especially for families that have more than two children. Because of the exemptions that are going away, they're no longer able to claim those exemptions, and that's causing a big increase in their taxable income as well," Lawrence explained.
“You've got this group of company drivers that — between being impacted on the per-diem and then perhaps not being able to take the same level of deductions for the number of children that they have — they're getting hammered. We've seen taxable income go up by as much as $20,000, $25,000 for large families between that and the per-diem."
As in the case of the single driver, that number is not an increase in actual tax but the taxable income. The amount of tax will depend on the particular tax bracket.
Note: There may be a per-diem workaround for some drivers, Lawrence suggested, that involves drivers' pay structure.
"If carriers are paying by the mile, they can split that out. They'll still pay the same dollar per mile, but they'll only classify 85 cents per mile as pay. Then they'll take 15 cents per mile and classify that as per-diem pay, which falls on the non-taxable side," he explained.
"A driver's overall pay would remain the same, but their taxable income would go down," he continued, "and so in essence, they're able to take advantage of the per-diem deduction just simply by the way the motor carrier is paying them."
Lawrence advised that drivers talk to their companies about this strategy. He noted that some of his tax firm's larger carrier customers have been inquiring about how to implement such a plan for their W-2 drivers.
All Class C corporations get a huge tax break, since the new law changes the top corporate tax rate from 35% to one flat rate of 21%. This rate will be effective for corporations whose tax year begins after Jan. 1, 2018, and it is a permanent change.
The other big news for carriers is a change in depreciation of equipment. Before the tax changes, equipment had to be amortized over time, but corporations can now take more of that depreciation up front, Lawrence explained. He suggested that Class C corporations synchronize their purchasing cycles with the accelerated depreciation cycle.
For small carriers operating as S corporations, generally those with five or fewer trucks, he suggested that they assess whether to change to a C corporation, but noted that most are not.
"All indications are that the motor carriers that are filing as S corporations are still better off maintaining that status — maintaining the pass-through entity status—rather than converting to a C corp.,” Lawrence said. “But that could change with changes in the tax law in future years" — perhaps something else to consider.