By Howard Abrams
Q: The cost of fuel is killing me. My equipment is older, and my repairs are more each year. Would I be better off with new equipment to maximize fuel efficiency?
A: It’s true you can get more mileage per gallon with a newer, more fuel efficient, aerodynamic truck. You would also be able to save on repairs and downtime. But you must know the answer to this question before making the decision to buy new: Do the savings in fuel cost, repairs and downtime more than offset the increased payments of a new rig?
In other words, will you be in a better financial situation?
Before you can decide whether to buy new equipment, you need to project your tax and financial situation to see if you will actually be better off economically. You need to do projections to compare your options.
Project your cash flow both short-term and long-term, paying particular attention to your fuel savings and your anticipated repair and downtime savings. Factor in your income tax savings as a result of buying a new rig. An income tax projection will allow the tax preparer to evaluate your situation so that you will have the knowledge and tools necessary to make a sound decision.
The result of the projection will then tell you your potential tax savings over the next three years if you buy the rig. That – combined with your savings from fewer repairs, parts, downtime and fuel efficiency – should give you a pretty good idea if you can afford an increase in payments on the new rig, and whether you should move forward or not.
You may find that financially you did yourself a huge favor. The projection is also used as a tool in other business and personal decisions.
Q: I’m always nervous about getting audited by the IRS. I have a self-employed trucking business. What are my chances of being audited?
A: The chances of being audited vary by your gross income. If your gross income falls between $25,000 and $100,000, you have a 2 percent chance of being audited. If your gross income is between $100,000 and $200,000, there is a 6.2 percent chance. If your gross income is in excess of $200,000, you have a 1.9 percent chance of being audited. Ironically, the chance of your partnership or S-Corporation tax return being audited is only one-half of 1 percent.
Q: I’m an owner-operator, and I’m concerned about losing my assets if I’m in a terrible accident. My buddies tell me to incorporate or operate under a Limited Liability Company (LLC) to protect my assets. Is this the proper thing to do?
A: Yes and no. You did the proper thing in asking a professional about what to do. Some people just go ahead and act based on what their buddies say. We are not attorneys, and therefore we cannot recommend what type of entity to operate for liability protection.
What we recommend is to talk to an attorney because attorneys are the only ones who can judge whether a particular operating entity will provide you with the liability protection you seek.
What we can alert you to is insurance coverage. Your liability limits on your homeowners and truck policies are probably too low in light of many personal injury awards. So, in addition to talking to an attorney, talk to your insurance person about adding “umbrella coverage” to your homeowner’s policy.
For example, a $5 million umbrella liability policy will cost about $1,200 per year or you can pay lower premiums for lesser coverage. This may satisfy your needs and could be cheaper than changing your operating entity.
Everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax professional.
Written by Howard Abrams of PBS Tax & Bookkeeping Service. Contributions were made by Shasta May, director of business development for PBS. For more information, call 1-800-697-5153 or visit pbstax.com.