When distilled down to its essence, a lot of what we call small business tax advice is very generic. Keep good records, maximize deductions, plan to make quarterly payments, maybe form an LLC or S-Corp to maximize tax benefits. Standard fare work for a consultant, a retail shop or even a restaurant does not translate well to a trucking operation.
Trucking companies sit in an entirely different taxation universe. The combination of costly, significant equipment purchases, operations in multiple states and industry specific rules creates tax events that generic business advice often does not capture. What is thoughtful planning for another business might inadvertently be detrimental to a trucking company’s operations.
The differences start with the basic structure of commercial operations and carry on throughout the long-term strategic planning cycle. Understanding these differences is important for compliance, as well as and most importantly for keeping more money in the business and potentially routing out costly problems (issues encountered in another industries are unlikely to happen in trucking).
Depreciation of Equipment Changes Everything
Most companies buy equipment that should last for a few years and ignores depreciation. Trucking companies buy assets that cost as much as houses and have brutal depreciation serials that can ruin a cash flow plan, or set one up.
A new tractor might cost you $150,000 or more. The tax treatment of that purchase will affect multiple years of returns. The timing of an equipment purchase, new or used, the amount of vehicles purchased each year and when the company dissolves or trades up is very different than other industries, and the tax implications for a trucking company far outweigh the decisions finance departments create for a company in retail or consulting. For trucking companies, Section 179 deductions and bonus depreciation regulations, which seem like minor tax incentives for other businesses, become significant strategic instruments for their company. The ability to expense the cost of large equipment purchases often allows companies to alter tax burden by tens of thousands of dollars in one year rather than the next, posing a decision on when assets should be purchased is a decision of strategy.
Here’s where it gets complicated: depreciation recapture when selling equipment can create unexpected tax liabilities which catch trucking companies off-guard. A truck that is fully depreciated for tax purpose still has a market value that knows no depreciation and selling that truck generates income truck operators never consider or plan for.
Multi-state operations create tax nightmares
Most small businesses are in one jurisdiction and deal with one state’s tax rules. Trucking companies regularly cross state lines and create tax obligations that are complicated to track and even more complication maintaining tax compliance.
Several states require mileage-based apportionment formulas which will importantly help track where trucks operated all year. Other states use different means for calculating the proportion of income taxable in their jurisdiction. Getting a state apportionment wrong not only creates a larger tax burden but may realistically require paying the same income to two different states. This is where the best 2290 e-file provider can come in handy to manage tax burdens to minimise payouts.
IFTA fuel tax reporting adds further complication that most business operations never consider. Trucking companies are required to track fuel purchases and miles driven in each jurisdiction and file quarterly reports reconciling IFTA for what was paid by fuel tax and what was owed based on actual operations. The administrative workload alone distinguishes trucking companies from standard small businesses. For example, a local service company can perform its own bookkeeping using basic bookkeeping software while a trucking operation may require more advanced systems and outside support to record all transactions properly.
Heavy Vehicle Use Tax Stands Apart
Form 2290 is a tax obligation that is wholly unique to most business owners. The heavy vehicle use tax is assessed based on the gross weight of trucks, rather than income or profits, creating a constant fixed annual assessment that must be budgeted for regardless of the business’s profitability.
Also, the heavy vehicle use tax is linked to vehicle registration and operation – trucks cannot legally operate without current 2290 filings and Schedule 1 with stamp showing that taxes were paid. Deadlines missed or improperly filed documents may cause operations to be halted until they get back in compliance.
The relationship with the 2290 becomes paramount in trucking, as other mistakes could mean lost cash flow and profit delivery in a typical business. A restaurant can amend their revenue on the next year’s tax return, but when a trucking company incorrectly files the 2290, the trucks cannot go on the road.
The due dates for heavy vehicle use tax also do not follow the same timelines as the other accounting deadlines for the business, adding additional compliance dates to those that trucking companies already must monitor.
The Importance of Cash Flow Timing
Trucking companies deal with nuances of cash flow timing that create difficulties for traditional tax planning developments. Fuel costs, maintenance costs and insurance premiums create sizeable irregular expenses that don’t follow the continuous monthly cost trends of many tax planning assumptions.
Additionally, many trucking operations also have seasonal fluctuations– some types of freight have a busier operational week for a particular time of year, producing income flow trends that does not work with statutory quarterly payments. Imagine, for example, taking equal quarterly payments, knowing that 60% of your income comes during harvest or holiday shipping periods. This creates unnecessary cash flow planning and stress.
Another cash flow timing possibility is future equipment repairs. A blown engine or failed transmission could create a $15,000 deductible expense in a single month, and may push income from one tax year to another, which also may change the planned mode of payment for you during planning. You can rely on your experiences, but other businesses rarely experience a single repair bill as a percentage of their annual income like a trucking company.
Per Mile Deductions vs. Actual Expenses
The IRS permits trucking companies to choose between a per-mile deduction or an actual expense method for vehicle expenses. This decision goes beyond the current year’s taxes. This decision impacts depreciation schedules, future sales of the vehicle and long-term tax planning, which other businesses never consider in their planning.
Per mile deductions can be easier to calculate and can also produce higher tax deductions for newer truck that achieve better fuel efficiency. However, with the per mile methods, a trucking company will not be able to take the actual expenses associated with maintenance, fuel expenses and or other operating expenses that may be higher than the maximum defined deduction associated with older vehicles or specialized operations.
A change from one method to the other requires IRS approval from methods, and future depreciation, and how the basis is calculated for future depreciation or when the vehicle is sold, will be different. A miscalculation in the initial method selected will introduce delay of possibly years of paying for a vehicle that was unnecessary.
Professional Relationships Are More Important
Many small businesses can manage their relatively simple tax preparation process using either an accounting software or some basic professional advice, while trucking companies realize disproportionate benefits from hiring an expert. The differences in either equipment depreciation calculations, multiple states, or industry specific deductions creates a situation, in trucking, that general business tax knowledge in some cases is simply insufficient.
Trucking CPA’s can see your expenses and recommend tax deductions on your behalf that a generic tax preparer will genuinely miss entirely. They also understand enough of the operational part of the trucking business to recommend timing expenses to align when the cash needs to happen with your tax repayment opportunities.
The cost of that specialty adviser has a way of paying for itself quickly when you consider the thousands of dollars sometimes associated with a single tax decision. For a trucking company, tax preparation is not just about compliance with IRS rules or suggestions it is a strategic business function affecting profitability and cash flow.
Understanding these unique elements of the taxation process for a trucking company is not solely a matter of following IRS rules. It is more about creating a sustainable operation that can handle the designated financial burdens inherent with the daily operations of being in the transportation industry. Companies that will thrive over the long term will typically early on identify that trucking means unique considerations to almost every part of standard business management, and especially taxes.
