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5 Things CPAs Must Be Aware of When Filing Taxes for Owner/Operators

The COVID-19 pandemic created a situation where e-commerce sales have grown astronomically—with total online spending in the month of May reaching upward of $82 billion (an increase of 77% year-over-year). This rapid increase in online sales also led to an upsurge in the demand for trucking services, and with trucks having limited storage capacity, the trucking industry as a whole has seen a steep uptick in demand and revenue—in September alone dry-van spot rates hit a record high of $2.37 per mile. With success comes responsibility: More than ever, it’s important for owner/operators to ensure their taxes are filed accurately and on time to maximize their return and avoid penalties.

Here are five things CPAs must be aware of when filing taxes for truck owner/operators:

1. Per Diem Rates

Filing taxes as an owner/operator can be complicated and navigating the tax code can feel arduous. One of the most beneficial tax incentives for an owner/operator is the ability to deduct certain costs under the travel expense tax category, including a per diem tax deduction equal to 80% of $66 per day. In order for an owner/operator to be eligible to receive a per diem deduction, the IRS has two specific requirements:

    1. The owner/operator will be away from home overnight while traveling for work
    2. Work requires travel substantially longer than the length of a workday

Be sure to keep track of receipts from travel expenses, including meals and lodging, in order to capitalize on all per diem tax deductions and avoid losing hard-earned money while on the road.

2. Mileage Deductions

For owner/operators, the IRS considers a semi-truck to be a qualified non-personal use vehicle, which means mileage cannot be deducted as a part of business expenses. This is because owner/operators are taxed only on the profit they make and receive deductions for time off and “deadhead miles,” or miles driven without a load on a truck’s trailer. Although mileage cannot be deducted while on the road since the truck is considered a non-personal vehicle, what can be deducted are actual expenses for the truck such as fuel costs, oil changes, minor and major repairs, insurance, and even tires. Additionally, while truck mileage may not be deductible, mileage on personal vehicles used for work can be deducted if the vehicle is used for business-related driving such as during trips to a supply store or the bank.

3. Depreciating Property Deduction

One of the largest tax deductions owner/operators are eligible for is the depreciable property tax which allows owners to deduct the depreciated value of the equipment that they use—most importantly, their truck and trailer. Owner/operators have the option to choose from a variety of different depreciation schedules in order to meet their specific tax needs, providing owners with the option of an expense deduction up to $1 million for a new truck in the first year of service.  The depreciating property tax may be one of the most important tax deductions an owner/operator needs to be familiar with.

4. Tax Form 1099-NEC

For the tax year 2020, the IRS resurrected the 1099-NEC (non-employee compensation) tax form requiring owner/operators to file their taxes differently than they have in the past. Typically, at the end of the year, an owner/operator would receive a 1099-MISC form from the companies they contracted as a driver for, fill out the form, and submit that form to the IRS. This changed for 2020; now the IRS requires owner/operators to complete both the 1099-NEC and the 1099-MISC. The 1099-NEC is used exclusively to report the compensation received by contractors for fees, commissions, rewards, and other forms of payment for services rendered while the 1099-MISC is used to report miscellaneous income such as rent or legal settlement payments. Ensuring the appropriate tax forms are correctly filed within the IRS deadline is important to prevent the IRS from performing an otherwise unnecessary audit of an owner/operator’s finances.

5. Security Dog

If an owner/operator brings their dog on the road with them, there are circumstances where expenses related to the dog can be used as tax deductions. If an owner/operator uses their dog as a form of security for themselves and their truck, then expenses related to the dog while on the road are tax-deductible. These expenses can include dog food, training, veterinarian bills, or other expenses incurred in the process of caring for the dog. In order to utilize this tax deduction, the IRS requires any dog used as a guard dog must receive training from an accredited training service or school—the cost of training is deductible as well.

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5 Biggest Owner Operator Expenses

5 Biggest Owner Operator Expenses

As of 2019, the average gross salary of an owner/operator is $220,591. However, this figure does not take into account the expenses incurred each week. On top of standard expenses, the installation costs of a new tractor can run a hefty price tag (over $100,000). For owner/operators, this presents a unique challenge of navigating their budgets.

The key is this: Like any business owner, you need to have a thorough understanding of your cash flow as a trucker, especially if you’re an owner/operator. By asking the necessary questions—“What are the costs of my expenses?” and “What is my net profit after taxes?”—can save you from encountering many financial troubles. By identifying your specific losses due to expenses, you’ll unlock the key to success as an owner/operator.

Here, we present five of the biggest owner/operator expenses and how to account for each in your total budget.

1.Fuel

Fuel is by far the greatest expense to those owning and operating a truck; the average fuel cost for owner/operators ranges from $50,000 to $70,000. You don’t have to estimate your fuel costs each week, month, or year, though. Plan in advance by sorting out your truck’s average cost per mile. This is done by dividing your fuel cost per gallon by average MPG, then multiplying that number by the expected number of miles you’ll drive. Once you have that number, the next thing to do is figure out your fuel efficiency.

The most effective way to get the ideal fuel mileage is by finding the best RPM to run your engine. When you pull your load with torque and not horsepower, you’ll burn less fuel because your truck will use less energy.

2.Your Truck

The truck itself is another large expense, and the primary truck-related expenses pertain to maintenance and tires. Though the price for maintenance may vary depending on other factors, such as the age of the truck, make, and model, alongside the quality of maintenance, you can still expect it to run you approximately 10% of overall costs. It’s helpful to budget for more than you think your maintenance will cost to avoid any financial surprises. Make sure to set aside a maintenance fund.

Furthermore, the average annual tire expense for retreading can exceed $4,000. This number is contingent on variables like miles driven, load weight, number of tires you have, types of tires you purchase, and wear patterns of the truck. When it comes to making the most cost-effective decision in purchasing tires, it’s important to consider the cost and expected lifespan of the tires.

3.Food & Drink

Even for the everyday person, dining out can quickly add up. Owner/operators are constantly on the go, and the prices of food and snacks are often significantly higher on the highway. This means it’s especially important to budget for eating at restaurants, snacks, and drinks. Once the budget is set, do your best to stick to it.

There are a couple of ways you can cut costs when it comes to food and beverage. Invest in keeping a mini-fridge and microwave in your sleeper. Owner/operators are also given a per diem tax break for travel expenses, including meals. As of last year, the per diem rate is 80% of $66 per day. Just be sure to save all receipts for qualifying tax deductions.

4.Taxes

As a hired truck driver, you hardly have to worry about taxes because the company handles such matters. However, owner/operators are responsible for paying a variety of taxes, including but not limited to the fuel tax, federal heavy vehicle use taxes, self-employment tax, and so forth. To avoid any unnecessary stress or confusion, use of a professional tax preparer to ensure you receive every possible deduction and your returns are handled properly.

5.Insurance

Trucking insurance also packs a hefty price tag, costing owner/operators anywhere from $8,000 to $14,000. Some coverage is required, while other insurances are optional. Common insurances needed are Truckers General Liability, Primary Liability, Physical Damage, and Non-Trucking Liability. Be sure to examine your coverages carefully as all insurance isn’t created equal. An insurer might offer cheaper coverage, but that doesn’t necessarily mean it’s the protection you’ll need on the road. Just as essential as having an insured truck is having health medical coverage for yourself. Be sure to factor this must-have into your budget as well.

For more information on how to achieve success as an owner/operator, be sure to follow our blog to stay in-the-know with the latest industry news.

Tax Update for Owner Operators and Fleet Owners

IRS Brings Back Form 1099-NEC

The IRS form known as 1099-NEC is returning for the 2020 tax year. The 1099 form has been in use for a long time—it’s the tax form used for independent contractors to report their taxable income. The NEC variant hasn’t always been in use, however, as it was replaced in the early 1980s by an updated, more robust version of 1099 MISC. This year, the form you’ll use to report information about your income as an independent contractor has changed. In this article we’ll describe why that is and what you need to know to be prepared. Filing taxes correctly can save you a lot of time, money, and headache—so make sure to do your due diligence and brush up on what’s new for 2020, and read our other tips for trucking success once you’ve made a plan for this tax season.

Supposedly, the revival of this tax form is in response to the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which now requires businesses to file new information returns that are specific to their 1099 (aka non-employee) workers by January 31 of each year. The PATH Act created new problems with the IRS and its ability to process data, because the due date for 1099-MISC forms those same workers would have to file wouldn’t be due until March 31. In order to skirt this issue, the new version of 1099-NEC, available on the IRS website, contains a new box for indicating non-employee compensation (NEC). Note, the 1099-NEC form isn’t replacing 1099-MISC. Rather, it’s a supplemental form that deals with NEC. As we’ll explain later, 1099-MISC is used to report many different types of miscellaneous income, and for that reason, it still remains in use for employers, businesses, and non-employed contractors alike.

How This Affects Fleet Owners and Drivers

If you work for a fleet or are a fleet owner yourself, it’s important to acknowledge this change. If you’re an operator, this will be the form you’ll have to fill out and supply to both the government and your contract supplier, which is slightly different from the 1099-MISC you’ve likely filled out in previous years and will have to fill out again this year. If you’re a fleet owner, this will be the form you’ll have to issue to your independent contractors in 2020.

Form 1099-MISC, which most seasoned owner/operators should be familiar with, is what’s called an information return businesses of all kinds use to report payments to outside independent contractors. This form is also used for other types of income payments like royalties and rent payments, which only applies to certain types of businesses. Any contractor who makes more than $600 from one particular source will receive a 1099-MISC from that source. For the most part, the 1099-MISC is filled out a lot like form W-2, except it has extra boxes for giving information about non-employed contractors.

The 1099-MISC form is an information return used to report types of payments made to independent contractors. Payments included can come in the form of royalties and rents as well, but for most O/Os, this form will be used to assess what you owe based on what outside businesses paid you during the last fiscal year.

Here’s a full list of income types that can be reported on a 1099-MISC:

  • Royalties
  • Rent
  • Fishing boat proceeds
  • Medical and health care payments
  • Substitute payments in lieu of dividends or interest
  • Crop insurance proceeds
  • Excess golden parachute payments
  • Gross proceeds paid to an attorney

So, What Do You Report on 1099-NEC?

1099-NEC is for reporting non-employee compensation. These include the following taxable payment types to independent contractors: fees, commissions, prizes, awards, and other forms of potentially non-monetary forms of compensation for services rendered. For every 1099-NEC, there are multiple copies that need to be sent to the proper parties.

Use this checklist to make sure your 1099-NEC copies get sent to the proper places:

  • Copy A: Send this copy to the IRS
  • Copy 1: Send to your state tax department, if your state collects income tax
  • Copy B: Send to your independent contractor
  • Copy 2: Send this copy of the state return to your Independent contractor
  • Copy C: To be kept for your business records

Have More Questions about Taxes?

Taxes can be difficult to manage, which is why we make a point to keep our readers updated on the latest changes to tax code and different financial strategies for owner/operators. If you’re interested in what truckers have been doing to find enough capital to stay afloat during the coronavirus pandemic, read our blog on short-term financing. Keep up to date on the state of trucking in America by reading our posts on supply chain and employment topics, which you can find here. If you’re new to trucking, and want to get started with your own fleet or your own rig, contact us with any questions you might have and we can help you get started in a brand new career.

An Owner/Operator’s Guide to Financing During a Pandemic

A lot of things are up in the air in light of the COVID-19 pandemic. If your business had just decided to put money down on future investments, or didn’t have much squirreled away to begin with, it can be difficult to trust the market to keep your business going steady—no matter if you’re an independent O/O or a fleet owner.

A survey Overdrive sent out in May found that their readers’ number one concern was freight pricing. Their second biggest concern? Cash flow.

These issues are pretty severely entangled with one other. Recently, we’ve seen some owner/operators in the perfect positions, geographically, start making money hand over fist, whereas other O/Os (only a couple thousand miles away) lost money every day driving half-full or even totally empty trucks. While there is some strategy available to maximize your business success during this uncertain time in freight, there are some problems that won’t budge without a heap of capital behind them.

Below, read our guide on the best ways to find financing during the pandemic.

Start with a PPP Loan If You’re Eligible

Paycheck Protection Program loans from the government’s Small Business Administration are, hands down, one of the most cost-effective ways to finance your business. These loans are designed to help small businesses pay their employees while the economy is slowed due to the coronavirus. As long as you do the proper research and only spend PPP loan funds on designated expenditures, your loan will be entirely forgiven once the term ends.

Unfortunately, these loans don’t always have the best legs. For some employers, a PPP loan will make sure you and your employees keep getting paid, but only for a time period of two to three months. But if your business hasn’t picked back up by that time, what will you do?

Research Private Lenders

If you haven’t been able to get a hold of a PPP loan, or you’re worried about what will happen once that loan runs out, it’s time to start researching and comparing private lenders. Financing is an important part of the job as an independent owner/operator, fleet manager, or truck dealership.

Most people won’t have $40,000 to $100,000 lying around to purchase a new rig for their business outright, and dealerships will always need large amounts of capital to meet the fluctuating demand for different semi tractor-trailer models. As a result, financing purchases has become the norm for O/Os and dealerships alike. While it can be more difficult to find favorable options as a dealership owner, there are plenty of options available to someone looking for private financing for a dealership.

Keep Your Eyes Open for Bad Deals

When financing a new truck, it’s crucial to take the process slowly and read all of the literature given to you by the lender. For the most part, your options as a future owner/operator include either taking an upfront traditional loan to finance your truck, or you can lease a truck for a certain period of time. Often, the comparison between these two options can be where a bad faith lender will try to take advantage of truckers new to the game—so it’s especially important to research which of those options best suits your lifestyle before you ask for cash.

Long leases will generally be more expensive in total than conventional loans, and they’ll leave you with no property to sell at the end of the deal to help recoup what you’ve paid. But if you’re worried about the market or expect to spend only a fixed amount of time in trucking, leasing your truck has the potential to be the most cost-effective option.

If You’re Buying, Save as Much as You Can Ahead of Time

The logic here is simple: Any money you can put down on your truck on Day 1 is money you don’t have to pay interest on. In addition to your credit history, having a large amount of capital on hand can act as collateral and help you get the best possible loan package. Plus, truck costs won’t quit once you’ve got your truck all to yourself. The first months with a new truck will inevitably be filled with small optimizations—technology changes, small additions, and the occasional stylistic upgrade. In order to make your truck the most comfortable and efficient it can be, you’ll need some cash set aside.

Contact a Lender You Can Trust

Always choose a lender with a long history in the business. Mission Financial has been providing truck financing for decades to owner/operators, dealership owners, and even capital to help keep your commercial fleet up and running. Contact us if you still have questions about the best ways to stay afloat throughout the coronavirus pandemic.

Keeping Semi-Truck Operating Costs Low

Trucking can be an expensive ordeal. This is especially true when you own or lease your own semi instead of driving a company-owned truck. Not only is the upfront cost expensive (hovering around $150,000), but the maintenance and annual expenses also pile up, usually costing around $180,000 to keep a commercial truck in a fleet every year. While many of these costs are unavoidable, there are several things you can be doing to minimize your operating costs to be as low as possible. Here are a few of our suggestions.

Slashing Fuel Costs

Fuel is one of the most expensive parts of semi-truck ownership, making up to 39% of operating costs. Depending on the area of operation, diesel can easily add up to over $70,000 a year alone. If you’re new to the industry, you might be unaware of the extent of this usage. To put it in perspective, the average car uses 500 gallons of fuel per year. In contrast, the average semi-truck uses 20,500 gallons annually, a staggering difference.

To help keep this lofty cost to a minimum, one thing you can do is to maximize your fuel efficiency. Every truck has a “sweet spot” where you’re going fast enough to make all of your appointments on time, but slow enough that you’re not burning unnecessary, excess fuel. To find your sweet spot, try monitoring your current fuel efficiency, and adjust your average speed accordingly.

Another way to cut down on fuel costs is to shop smarter when filling up the tank. As it does with normal automobile gas, diesel prices fluctuate drastically depending on the area. The U.S. national average cost per gallon of diesel hovers around $3.17. This changes by a few cents depending on the exact station and area, but there are a few ways to avoid overpaying. In general, diesel is more expensive on the West Coast. This is mostly due to the famously overpriced California. If you can, try to plan out your route so that you can avoid filling up in this expensive area. Additionally, if you have the resources to do so, alternatives to diesel fuel could potentially help you save on this massive expense.

Getting Affordable Insurance

Insurance is another sizable cost of operating a semi-truck, as there are over 9 different policies to buy and consider. The costs of these policies are usually around 4% of overall operating expenses, which may seem like a small fraction but is really thousands of dollars. While you don’t have a choice in whether or not you purchase these insurance policies, there are a few things that you can do to lower your rates and get the cheapest possible insurance deals.

One of the most important things you can do to lower your insurance rates is to keep your driving record as clean as possible. Drivers without any major infractions are considered less of a financial liability for insurance providers, and this trust translates into lower rates. While adhering to safe and orderly driving practices is important for the wellbeing of the public, it’s also essential for the wellbeing of your pockets.

Avoiding Unnecessary Repairs

Truck repairs can really add up, adding thousands to your annual bill. While it may sound counterintuitive, one of the best things you can do to minimize these costs is to pay more upfront. Being diligent about regular maintenance can actually lower your overall costs by preventing emergency repairs or paying for an accident resulting from faulty equipment. Waiting until equipment malfunctions or breaks down results in having to replace it all together rather than just taking proper care of it to preserve it.

Breakdowns due to poor maintenance can also lead to bigger issues affecting other tuck parts, or they can even leave you vulnerable to accidents that endanger you, the public, and your entire rig. Schedule regular maintenance to keep your semi in pristine working condition.

Schedule Your Routes Carefully

Since most truck drivers are paid by the mile, one of the best ways to optimize your pay per hour is to reduce idling time or time spent sitting in traffic. Any time where the truck isn’t moving is money right out of your pocket. While the conditions might not always be in your control, you can always make your best effort to avoid it.

Try to plan out your routes to avoid heavily congested areas during busy times such as the morning or evening rush. If you have the freedom to do so, take less popular roads during these times to try to skirt around traffic jams. While you might take a slightly longer route mile-wise, it will improve efficiency by allowing you to complete routes faster. Additionally, this can result in safer traveling due to clearer conditions, as traffic jams are often risky in terms of fender benders.

Maximizing Profit

When it comes down to it, driving a semi-truck is your career, and we all want to make a living wage. Keeping operating costs low is the best way to squeeze the most out of your salary. There are several invisible strains on your operation that you might not even realize. For example, truck stops sell more coffee than convenience stores, and the majority of these sales are to big rig drivers. Something as simple as streamlining daily purchases can make a difference in your daily profit margin. While you won’t necessarily be saving thousands by skipping that second cup of joe, making small changes can add up into healthy financial habits that save you big money later on.

For more information about how to get the most out of the trucking industry, check out Mission Financial!

Everything You Need to Know about Annual Semi-Truck Maintenance

Semi-truck maintenance can be expensive and unpredictable, but it’s a necessary evil that comes along with ownership. It’s tempting to put off repairs until damage occurs, but regular maintenance is crucial to preventing more serious problems down the road. Preventative maintenance can save costs and eliminate downtime for your truck. Annual repairs and tune-ups are recommended by industry professionals, but how often are they really necessary, and how much should you be saving for them? Here are our recommendations for how to keep up with your annual semi-truck maintenance.

What Yearly Maintenance is Necessary?

Major engine repair can cost up to $22k, so preventative measures are cheaper in the long run. While the intricacies of your truck are unique, there are a few measures that are standard for all trucks. While many are relatively cheap and mundane, they can prevent engine and body damage that could potentially cost you a small fortune in repairs. Here are the most important methods of regular truck maintenance to keep in mind:

  • Checking tires for wear
  • Regular oil changes
  • Fuel Vent Cleaning
  • Brake checks
  • Add Grease to Moving Parts
  • Check Radiator for Leaks and Fluid Loss

Some Repairs Are More Important Than Others… 

While all regular maintenance is important, there are three things that are especially crucial: tires, radiators, and oil changes. These are particularly important because they can cause the most expensive damage if left unattended.

Tires

 Replacing your worn tires is essential for responsible truck ownership due to the dangerous alternative. Popping a tire on your route becomes a massive collision risk once you lose control of the vehicle. When you drive with worn tires, you risk damaging your own truck, public property, as well as posing a massive public safety risk. It’s important to be able to recognize when your tires have worn down too thin. Most semi-truck tires have clear indicators of this, known as “tread wear indicators,” and if they’re visible, it’s time to replace. They usually just look like flat bars running the width of the tire. A good standard to follow is to reassess every 100,000-150,000 miles or if you notice a cracking or bulging along the sidewalls of the tires.

Oil Changes

Oil changes are vastly important, and if you don’t keep up with it, you’ll start to see a plethora of problems with your engine. Oil changes clean out sludge and grime, and without them, your engine could overheat and cease its normal functions, leading to a much bigger bill. While your truck might have a light that comes on on your dash when it’s time, the best way to be sure of your oil situation is to regularly check your oil stick.

Radiator Maintenance

It’s important to check for leaks in your radiator and replace any fluids that appear to be running low. These efforts also aid in the prevention of an engine overheat. Engine care is especially important considering that it can be one of the most expensive repairs you’ll ever have as an owner-operator.

How Much Should You Save?

It can be difficult to judge how much money to put away from each paycheck towards a maintenance fund. These costs will differ dramatically depending on various factors. One of the most important factors is your own skillset. Doing the maintenance yourself will be a fraction of what it would cost you to go and have it done by a professional. If you’re not well versed in semi-truck maintenance, you’ll have to fork over significantly more dough, but the quality is the most important priority when it comes to taking care of you and your livelihood. Additionally, the type of truck that you have matters. Older trucks tend to have more expensive maintenance proceedings due to the rarity of their parts and the added wear and tear.

While there is no exact formula, there is a usual estimate based on miles driven that industry professionals recommend using. Usually saving between 5-10 cents per mile driven is a good idea, but if you’re finding that you have to save more than 15 cents per mile, it might be time to consider replacing your truck in favor of a more dependable option.

Staying Safe and Financially Secure

Breaking down due to poor maintenance can not only cause expensive repairs, it can majorly cut into productivity, as you have to stop your route and seek help. Sometimes you even have to forfeit your haul and therefore lose out on the pay from the entire trip, putting you behind on paychecks with the added stress of repair bills.

It can additionally be dangerous to not have a properly functioning semi, as many of these repairs are essential to having total control of the truck. It can be especially unsafe if you break down on a route and you’re in an unfamiliar place without immediate assistance. All of these factors are important to consider before getting a semi-truck, as these procedures are part of operating costs that will determine your overall profit and lifestyle. If you think you’re ready to take it all on, contact Mission Financial to get started with your semi-truck financing!

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