Owner Operators - Tax Tips

Understanding Equipment Transactions


By PBS Tax & Bookkeeping

Always consult with your tax advisor before you buy, sell or trade equipment. Many people don't realize that when they sell or trade their existing equipment they usually have some type of tax consequence. For example, let's say two years ago you acquired an asset (new tractor) for $100,000 and that you have depreciated $80,000. Your tax basis in that property is now $20,000 ($100,000 original cost less $80,000 depreciation taken). If you were to sell that equipment for $50,000, you would have a gain of $30,000 and the gain is taxable ($50,000 less tax basis of $20,000).

The gain is ordinary income, not capital gain. If you traded in the old equipment instead of selling it, there would be no gain to report on your tax return, but the depreciation available on your new equipment would be $30,000 less (unreported taxable gain).

Remember, what you owe on the equipment has nothing to do with the tax calculation. You could sell your truck for $50,000. But if your loan payoff is $70,000, you will still have a $30,000 taxable gain.

Be sure to discuss with your tax preparer any potential tax consequences before finalizing any equipment transaction.

TAX TIP - Per Diem

The per diem rate for the 2006 tax year is 75% of $52.00 per day. For truckers who travel away from home for most of the year, that's a substantial tax deduction. We receive many calls from truckers who say ??oemy truck is my home.” If that's the case, you are not entitled to a per diem deduction. A trucker needs to have a tax home. Temporary living expenses such as rent, food, and laundry are only deductible by a taxpayer who is away from home on business. Generally, to establish a tax home you must be able to demonstrate to the IRS that, as a result of your extensive business travels, you were required to incur duplicate living expenses at your permanent residence. Obviously, if you own a home or pay rent, that would qualify as a permanent residence. Warning: The tax court ruled that if you have no tax home, i.e. no permanent residence, you are not entitled to the per diem expenses incurred while away from home.

REMINDER: GET YOUR INCOME TAX PROJECTION DONE

If you still haven't had an income tax projection done, now is the time. You now have almost eight months of operation for the year, and it is more than enough income and expense information to project your profit and loss for the rest of the year. As a self-employed person, you need to know where you stand before the end of the year in order to make financial decisions. Will you owe money to the IRS on April 15, 2007? Have you overpaid your income taxes? Is there anything you can do now to reduce your tax liability? Will it help to buy some tires or make a contribution to a retirement account before the end of the year? Being able to answer those questions will enable you to plan for the remainder of the year. You may be planning to purchase a new truck, take some time off, do a major truck overhaul, fix up your home, or add to your retirement savings. Though your records should be looked at by your tax preparer throughout the year so that he/she can spot potential problems or adjust your estimated taxes, a tax projection based on your current operating results will best indicate your tax position before the end of the year so you can plan and make changes.