Barry & Howard
PBS Tax & Bookkeeping
Truckers sell their rigs for a variety of reasons. Sometimes it's because they have decided to become a company driver or to pursue a completely different career. Sometimes it's because they are finally getting to retire.
Other reasons behind a rig sale can be less pleasant, but they are just as real - repossession, bankruptcy or a large tax bill.
Tax bill? How can this be?
Let's review the transactions involved in purchasing a truck. You buy a truck for $100,000 and you set it up for a three-year depreciation. You put $20,000 down and borrow $80,000 against the truck to be paid over five years.
Let's assume you have taken a full $100,000 depreciation. Let's also assume that you also owe $25,000 on your loan at the end of four years. You decide that you will no longer be an owner-operator and sell the truck to become a company driver.
If you sell the truck for $30,000 and you owe $25,000, your net check is $5,000. However, you have to pay income taxes on the gain on the sale of the truck.
"What do you mean a gain on the sale of the truck?", says the owner-operator. "I bought the truck for $100,000 and sold it for $30,000. I feel I lost $70,000 not to mention the $20,000 down payment and the $60,000 I paid against the loan plus all the interest."
Unfortunately, that's not how the IRS sees it.
According to the tax law, there is a gain as follows: the truck cost $100,000, with depreciation of $100,000, so according to the IRS you have an adjusted cost basis of zero - your cost less your depreciation taken.
Therefore, whatever price you sell the truck for is gain since you've had the benefit of writing off your depreciation.
In this case, you sold the truck for $30,000 and you have an adjusted cost basis of zero, therefore, you will show a $30,000 gain on your income tax return. The balance due on your loan has no bearing in computing gain or loss in the eyes of the Internal Revenue Service. That was just how the truck was financed.
As far as the IRS is concerned, you could have paid cash for the truck and therefore if you sold it for $30,000 and had an adjusted cost basis of zero before taxes, you had a $30,000 taxable gain, same as before.
However, you walked away with $30,000 in cash since you are not paying off any loan. The taxes on the $30,000 gain can amount to anywhere between $8,000 or even $10,000 depending on your tax bracket and situation at the time.
This column is written by Howard Abrams and Barry Horwitz of PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter century. Contributions to this column were made by Shasta May, director of business development for PBS. For more information, call 1-800-697-5153 or visit pbstax.comon the Web.
Everyone's financial situation is different. This column does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.
Tax relief, deadline extensions for Hurricane Katrina victims The Internal Revenue Service has announced guidelines for taxpayers impacted by Hurricane Katrina. Even if you don’t live in the hurricane areas, you may be eligible for tax relief if the storm had an impact on your business. Deadlines for affected taxpayers to file any returns, pay any taxes and perform other time-sensitive acts have been postponed to Jan. 3, 2006. In the hardest-hit areas – those designated by the Federal Emergency Management Agency as “individual assistance areas” – the tax relief will be automatic, and taxpayers won’t need to do anything to get the extensions and other relief available. In areas where FEMA has determined damage is more isolated – designated as “public assistance areas” – or for other taxpayers who reside outside the storm area, people will need to identify themselves as hurricane victims when filing with the IRS. The IRS will also work with any taxpayers who reside elsewhere but whose books, records or tax professional are located in the areas affected by Hurricane Katrina. The IRS encourages all taxpayers affected by Hurricane Katrina to write “Hurricane Katrina” in red ink at the top of any documents they file. For more information, call the special IRS disaster hotline at 1-866-562-5227. |
