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AUG/SEPT 2009

 

MID YEAR TAX TIPS FAQ’S

EQUIPMENT SALES & ESTIMATED TAXES

 

The following questions are the most common of recent daily phone inquiries.

 

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

 

A. While cancelled debts and loan forgiveness currently may not be taxable, 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 principal 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 recapture would be included in income in the year of sale (that may be the entire gain).

 

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

 

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).

 

Example – Cost of Tractor                                         $50,000

                   Less: Accumulated Depreciation              40,000

                                                                                   ________

                   Adjusted Basis                                         $10,000

                                                                                   =======              

                   Sales Price                                                17,000

                   Less: Adjusted Basis                                10,000

                                                                                    ________

                   Gain on sale                                             $ 7,000

                                                                                    =======

 

 

 

TIP - Before you sign any contract make certain you know and understand the tax consequences.

 

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, 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. Example, fuel, insurance, start up costs and per diem to mention a few.  You will be spending money before you realize (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 to the self employment tax. Your only options are either to 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 tax and therefore they cannot believe what they owe on their income taxes.

 

Q. I have been told that if I purchase an auxiliary power system I will be getting a special tax credit. Is this true and how much will the credit be?

 

A. We have been unable to find any reference to a special tax credit for the auxiliary power system/generators/anti-idling devices.  If the manufacturer is claiming that a special tax credit is available, we would need to know the IRS revenue code section they are referring to which the credit applies so that we can verify the claim.

Please be advised that the cost of the auxiliary power system/generator/anti-idling device is a legitimate business expense that is deductible, however it is a special tax credit that is in question. The unit qualifies for sec. 179 expensing and for 50 percent bonus depreciation. Your individual state may have incentives to buy. 

 

This article has been presented by PBS Tax & Bookkeeping Services, a company that has been providing income tax and bookkeeping services to the trucking industry for over a quarter century.  If you would like further information, please contact us at 800-697-5153. 

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Please remember 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 or accounting professional.