November 30, 2018
Q: My trucking business has been quite successful this year. But, I don’t know what to expect when my taxes are actually done because of the new tax law that took effect January 1, 2018. What should I do?
A: Now is a good time of year to prepare for 2018 taxes, which under the new tax law, will be different than your 2017 tax return. It’s extremely important that you should have a tax projection of your 2018 income taxes prepared. Under previous tax law, all net income or loss from a sole proprietorship, partnership, or S-corporation would not be taxed on the entity level. Instead, it would be passed on to the individual members. This pass-through income would then be taxed based on the member’s tax rate.
The Tax Cuts and Jobs Act added an estimated 20% deduction for any taxpayer that has Qualified Business Income (QBI) from a sole proprietorship, partnership, or S-corporation. For the average sole-proprietor owner-operator, this could mean a tax savings of around $2,000 per year.
Q: What is an Income Tax Projection?
A: Think of income tax projection as a mini tax return done during the year using year to date results projected to reflect a full year results.
Q: How is it done?
A: First you need to know your year to date net income as of a certain date then add to that the projected net income for the rest of the year. That will give you the projected net income from operations for the year. Then make your adjustments such as depreciation and per diem, (if applicable) to arrive at a projected business income for tax purposes. Then project what your taxes would be by preparing a preliminary tax return.
Q: What is the purpose?
A: To find out whether you will owe or get a refund and to adjust your estimated taxes accordingly. You may have to adjust your projection based on actual results going forward.
The benefits from the tax projection are as follows:
- Reduce potential penalties by not estimating your taxes accurately.
- Allows you plenty of time to do tax planning prior to the end of the year.
- Helps you determine the availability of cash regardless of whether you will owe or get a refund.
Q: I own a trucking business. I use the cash method of accounting. While looking over my books I realize that I may have a large net profit from my business. How can I reduce my net profit in order to reduce income and self-employment taxes due? I have several expenses that I have not yet paid. Can I write checks for these expenses and mail them by December 31, 2018 and deduct the expenses on my 2018 tax return?
A: Yes, you can deduct the expenses on your 2018 tax return as long as the checks clear when they are presented to the bank.
Changes to Depreciation and Section 179 Expensing
The way you depreciate your truck is another major change that came from tax reform. Before the Tax Cuts and Jobs Act, tractors would be depreciated over a three-year period, while trailers would depreciate over five years. However, beginning in 2018, 100% of the purchase will be automatically depreciated during the year the equipment was put into service. You will have the option to opt out and continue with a normal depreciation schedule if you’d prefer.
After 2022, the amount of bonus depreciation will begin to be phased out with 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Plus, in the past, bonus depreciation was only allowed on new equipment. Now, it can be applied to both new and used equipment.
Those of you who have utilized Section 179 understand that this allows you to immediately depreciate personal property, which could include tractors or trailers. The Tax Cuts and Jobs Act pushed the maximum amount from $500,000 to $1 million. It also increased the phase-out amount to $2.5 million.