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Tax Tips
So what taxes do I really owe?

By Howard Abrams
PBS Tax & Bookeeping

 

Q: Why do I owe taxes if my truck was repossessed?

A: Canceled debts and loan forgiveness may not be taxable currently, but you may have to pay tax on depreciation taken. This is known as recapturing prior depreciation.

Q: I sold my truck for no cash, and the buyer took over the remaining payments. Why did I have to pay tax on that?

A: The law is such that the portion of the loan taken over is considered the sales price. Since you did not receive any cash in the transaction, you would have to pay taxes from money you already had in savings.

Q: What if I sell my equipment, and the buyer pays me over a three-year period?

A: This would qualify as an installment sale, and you would spread any gain over the period you collect the money – in this case over three years. However, any depreciation recaptured would be included in income in the year of sale (that may be the entire gain).

Q: I just started in the trucking business as a sole proprietor, and I think I need to make estimated tax payments. At least, that’s what a friend told me. Is that true?

A: It is true that you have to make estimated tax payments, but the real question is when.

As a rule of thumb, estimated taxes are due in the first quarter that you actually will owe taxes. For example, let’s assume you just went into business and bought equipment. The equipment will give you depreciation, which helps reduce taxes. Additionally, you will be incurring expenses before you realize income – for example, fuel, insurance, start up costs and per diem.

You will be spending money before you actually collect the income from those expenditures. At that point, you have not created a tax liability to owe estimated taxes. However, you will need to monitor your results of operations monthly or quarterly and do tax projections to see when you might begin your estimated tax payments and how much to pay.

Q: I am driving for someone who does not want to withhold payroll taxes. What do I do about taxes?

A: You will be responsible for the full brunt of the self employment tax. Your only options are to either convince your employer to withhold taxes, go find another company who will withhold taxes, or pay estimated taxes on what you will owe. The way it stands now you are self-employed without the benefit of depreciation to write off. If this is not your intent and you want to be a company driver, then you need to look elsewhere.

If you stay in your current position, you will be responsible for paying estimated taxes. Essentially, your net income will be your gross pay less any non-reimbursed business-related expenses you incur such as per diem, cell phone calls and supplies. You will be subject to income tax, after the normal deductions, as well as the self-employment tax based on your net income.

The major mistake drivers make in your situation is not paying estimated taxes. Consequently they cannot believe what they owe on their income taxes.

Q: I sold my equipment at a loss, paid off my loan balance, and ended up without any cash. So I couldn’t believe when my tax preparer told me I owed tax on that. Why did I owe tax?

A: When determining gain or loss on a transaction, loans and loan paybacks are ignored. What you do is subtract your adjusted basis from your sales price to determine gain or loss. The adjusted basis is the cost of the equipment less any depreciation taken (accumulated depreciation).

Tip: Before you sign any contract, make certain you know and understand the tax consequences. LL


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.

This article is written by 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. If you would like further information, please contact PBS at 800-697-5153 or see their Web site at
www.pbstax.com.