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2000 379 Peterbilt
What You Need to Know to Become an Owner Operator
6) How to Do Bookkeeping and Other Necessary Paperwork
Permits and Taxes
Keep in mind that we have been doing this since 1972, so we will probably miss some stuff. If you don't see what you are looking for, just ask. It is difficult to describe something that to you is routine, but is all Greek to someone else.
Think about when you were learning to use the computer for the first time. You might have asked someone, “How do I find information about ACB company?” The old hand may have said, “After you open your browser, just type their address into the search bar.”
You were probably thinking, “What is a browser and how do I open it? How in the heck do I know what their (mailing) address is? What is a search bar and where do I find it?” To the person explaining it, they were very clear and made perfect sense. To you, their explanation was as clear as mud.
I will try to keep that in mind, but as I said, if I miss something, or don't explain something well enough, let me know and I well see if I can confuse you some more, uh, er, sorry, I mean clear it up.
My advice is to find a good accountant, who knows the trucking industry. The rest of this article is to just give you an overview of what and how expenses are counted. Keep in mind that for every rule the IRS has, there are several exceptions.
Where to begin? When I first started as an owner operator, in 1972, there was no such thing as a computer. Everything was done by hand! Can you imagine? At least we had adding machines, but I can't tell you the number of times we would spend a couple of hours going over a column of figures trying to find a mistake.
Today all you need is a computerized spreadsheet, or better yet a bookkeeping program. I first started out with something called Lotus. I am now using an old (2000) version of Quicken. It does the job for me, and I don't have any need to change. What program you need to use depends on what you need to track. If all you need is to keep track of is your income, expenses and mileage, any bookkeeping program will do. If you need to track information so you can do your own permits and fuel taxes, or if you plan on hiring an employee, you may want to consider a bookkeeping program geared to the trucking industry. There is a lot of trucking software around, but having never used any, I can't recommend one. If any readers have used any trucking bookkeeping software, especially owner operator software, please leave a comment and tell us what you use, what you use it for, if you like/dislike it and why.
Since the company I am leased to does all of the fuel and mileage taxes, and permits, we don't have a lot of book work to do, as we used to. We don't use an accountant. We never did. My wife kept track of the income and expenses and we would take the totals to a tax preparer to have our income taxes done. After finding mistakes for 3 or 4 years, and having to take them back and have them redone, she got tired of that and decided she could do the job as well as they could. She started ordering tax books from the IRS (now days you can get them online), and she started doing our taxes herself.
What kind of paperwork you will need to do, will depend on several factors. There is one rule that can't be broken, however, no matter what else you do: KEEP ALL OF YOUR RECEIPTS! For everything (except maybe meals – see later).
Before I go any further, I want to remind you that we are in the trucking business – not the tax business. Anything I say, you should have checked out by someone - an accountant or tax professional. See "Income and Expenses"
The information I am giving is just our experience and should be used only as a starting point, so you will know what questions to ask of your accountant or tax professional, and to help you understand what they are talking about.
How much of the following you, personally, need to do depends on how much someone else does for you, such as the company you are leased to, or an accountant you hire.
If you are unsure if the person you are going to knows trucking specifically, find someone else. If they give you information that doesn't sound right, call the IRS (or OOIDA) and ask about it. A good source for tax information is trucking magazines and organizations. Owner Operator Independent Drivers Association (OOIDA) is excellent – yes I am a member, no I don't get anything for plugging them. Most trucking magazines will run articles during tax season about tax questions specific to trucking, and some even have monthly tax columns.
If you are an independent owner operator – that is if you have your own authority, you will have to keep (or hire someone to do it for you) records for: every expense, all income, all capital (equipment) expense, miles run in each state, total miles, fuel purchased in each state, total fuel, and drug and alcohol testing (yes, even if you are the only person in your company).
The DOT tells you how drug and alcohol testing has to be done. They have very specific rules about pre-employment, random, and post-accident testing. The most difficult thing for the person who has their own authority and no employees, is the random. In spite of what you might think, you can't just get up one day and say, "Well, I haven't had a drug or alcohol test for a while, guess I'll go have it done today." Oh, Nooo! You have to select a "random person" on a "random basis" to have a drug and alcohol test, and you must keep very detailed records about who, how, when, and why. That is why you are required to hire a consortium. A consortium pools a lot of individuals together, pulls the random draws and does all of the required paperwork and record keeping.
As I said before, I am an OOIDA member, and I think they are one of the best things that ever happened for the owner operator. OOIDA is a full-service organization and help with drug and alcohol testing for you, as well as help you get your own authority and permits. They have owner operator insurance, trucking and personal vehicle insurance, medical insurance, retirement, and tons of information about the trucking business. Membership fee is only $45.00 a year, which includes their very informative magazine, Land Line.
If you are leased to a company it depends on how much, if any, of the above they take care of on your behalf. Whatever they don't do, you have to.
As I said, keep all of your receipts for everything. If you hire an accountant, you take your receipts and settlement income (pay) statements to them. Some people I know put these receipts in folders with different categories. Some people will even total those categories, but most owner operators I know throw all their receipts in a box and take the box in to their accountant, complete with spilled french fries. Most accountants require that you take this box to them at least once a month.
The perfect way, although I don't know anyone who does this, would be to have a laptop, and enter each expense at the time you buy something, or as soon as possible afterward. I don't advise you to try to enter your toll receipt while driving though (ha, ha).
If you are going to be keeping the books yourself, whether or not you do your own taxes, you should enter everything as soon as you can – usually at least weekly. It is so easy to put it off and the first thing you know, it is tax time, and you haven't made but one or two month's worth of entries.
What records you keep and how you keep them will depend on what type of entity you are. Are you a sole proprietor, a partnership, a LLC, an S corporation, or a corporation? Most likely you will be a LLC.
If you are a sole proprietor, you will use your social security number as your tax number. For all other entities, your will have to file Form SS-4, Application for Employer Identification Number - EIN (you can also file for a EIN online). It's FREE!
If you are a sole (single) proprietor (owner) it is fairly easy to keep records, as everything is 100% yours, income and expenses.
You are also 100% "at risk", meaning all debts, but more importantly, all judgments against your business. In other words, if someone wins a lawsuit against your business, even if your business files bankruptcy, you are still liable for the debts.
You are required to file a Form 1040 Schedule C (or C-EZ) - profit or loss from a business - sole proprietorship, and a Schedule SE - self-employment.
If you are a partnership, it becomes a little more complicated. How is the partnership split? 50/50? 60/40? Something else? It makes a difference when you file your taxes. If it is 50/50 and you buy a $100,000 truck, each of you owns $50,000 worth of the truck. Each of you will share 50% of the income. If you financed the truck, then each of you is responsible for 50% of the debt. Now apply that to 60/40 or some other percentage. See, it is getting a little more complicated. Now are both of you active partners? An active partner is one who participates in the partnership. For example, you drive and your spouse does the book work and record keeping. You are both active partners. However, if you drive and you hire an accountant, and your spouse doesn't do anything else, then your spouse is a passive partner, but if you and your spouse drive team, then you are both active partners. Another example: Your brother paid for the truck and wants a percentage of the profits in return, but you do all of the driving, maintenance, and everything else. He is a passive partner. Now, what if you have more than one partner? Some of them could be active and some could be passive.
Which partners are "at risk", and for how much? Are any of them guaranteed a set payment, no matter how much the partnership nets?
You are required to file a Form 1065 (with a Schedule K) - partnership, and give a Schedule K-1 to each partner.
The partnership does not pay taxes. It passes all profits and losses on to the partners using a Schedule K-1. Each partner is required to file on their Form 1040, a Schedule E - supplemental income and loss, and a Schedule SE - self-employment. Each partner then takes his share of profits or losses on their Form 1040 based on the amounts on the Schedule K-1.
A LLC is a Limited Liability Company. It used to be that if you weren't a sole proprietor or a partnership, then you had to be a corporation or S corporation (small corporation).
Now they have the LLC's (Limited Liability Corporation) which is a relatively new business structure allowed by state statute.
LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. The reason the owners have limited personal liability is because the LLC is required to carry liability insurance usually for about one million dollars.
Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation (the LLC doesn't pay taxes, but "passes through" the tax liability to each member).
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner. Some kind of "Articles of Organization" with your state will be required before becoming an LLC. A limited liability partnership is called a LLP.
Individual members file a Schedule C, partnership members file a Form 1065, and corporations file a Form 1120 or 1120S. Except for Schedule C files, you will have to file a Schedule E, and a Schedule SE.
All of this may make a difference in how you track your expenses and income.
When you become an owner operator, you become a businessman, excuse me, businessperson, and you also for some purposes become an employer (even if you don't hire an employee). Because of that, you must pay self-employment taxes on your earned income, which consists of both the employer and employee share of taxes (you are, in effect, hiring yourself). These must be paid to both the Federal and State tax departments. On the other hand, you get to deduct amounts for an IRA (Individual Retirement Account), a SEP (Simplified Employee Pension) plan, health insurance, and 1/2 of your self employment taxes. There may be limits on some of these deductions, so be sure to check it out.
Speaking of being an employer, you can pay your children to wash your truck, your spouse to keep the books, or mother to be a co-driver. These payments are deductible, but you have to pay employer taxes on the amount you pay them (unless one or all are co-owners), and they have to pay income tax on what they earn from you.
On the subject of spouses, if you and your spouse share management decisions, you are automatically considered a partnership by the IRS, unless you elect not to be. If only one of the spouses makes the decisions, and you don't have any other partners, then you will be a sole proprietor and you can hire your spouse, such as to do the bookkeeping. If you do not "opt out" of being a partnership with your spouse, then you have to file a partnership return (Form 1065), an you each share in the expenses and income on a Schedule K-1. See: IRS site: "Married Couples in Business" for details.
Once you have decided what kind of entity you want, and gotten your EIN, if needed, the first thing you need to do it register your business with your state and get your business license. You may also be required to get a license in your county (parish) and/or city.
Almost every penny you spend can be used to reduce your taxes in one way or another. Some expenses can be deducted, and some have to be depreciated. The IRS tells you what has to be depreciated. Generally it is equipment (property as the IRS calls it) used in your business, and the cost of improvements.
Deduction: You take the cost off of you income. Example: You buy a tire for $300.00 - you take $300.00 off of your income.
Depreciation: You can not take the cost off of your income, but you "depreciate" the cost (according to IRS rules) and take a percentage of the cost over a certain length of time (set by the IRS). Example: You buy a truck for $30,000.00. The first year you deduct the depreciation amount of $9,999.00, $13,335.00 the second year, $4,443.00 the third year, and $2,223.00 the fourth year, for a total of $30,000.00. This is a simplified example. See your tax advisor for details.
How it is depreciated, and how much it is depreciated, depends on what it is, what time of the year it was purchased (or sold), whether you had a trade-in, and whether the trade-in was the same type (like-kind) property, or whether you sold property and then purchased property (even if it is the like-kind), and what the useful life of the property is. The IRS tells you what the useful life is.
If you are leasing (renting) a truck from a company, first, you have to determine whether you really are leasing, according to the IRS:
You must first determine whether your agreement is a lease and deducted as rent, or a conditional sales contract and will be considered as a purchase of the property.
If it is a lease, then you deduct the payments. If it is a conditional sales contract, then you can not deduct the payments, but have to depreciate the equipment.
Is it a repair or an improvement?
Replacing a head gasket is a repair. An overhaul is an improvement. Separate depreciable property means you would depreciate the truck as one item and the overhaul as another, separate, item.
You generally deduct the cost of repairing business property in the same way as any other business expense. However, if a repair or replacement increases the value of your property, makes it more useful, lengthens its life, or adapts it to a different use, you must treat it as an improvement and depreciate it. Patching a hole in your trailer floor is a repair and the cost is deducted. Replacing your trailer floor is an improvement and the cost is depreciated. You can deduct the interest you pay on any loans for equipment or improvements.
Tires are always deducted because they are considered to have a useful life of one year. The IRS tells you what the useful of everything is. An over the road tractor has a useful life of three years, while a trailer is five years. Here's a new one that some accountants may not know (but should): an auxiliary power unit (APU) is five years.
There is also the Section 179 deduction. Section 179 gives you a choice to deduct, instead of depreciate, depreciable property – up to a certain limit, which was increased for 2009 as part of the stimulus package.
2019 will see changes on Section 179, and the amount you can deduct instead of depreciate. There may be other changes, too.
Any interest on equipment purchases, loans, or credit card purchases (for the business), is allowed as a deduction. Penalties (late payment fees, fines and tickets, etc.) are not deductible. Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Treat this interest as a business deduction only in figuring a net operating loss deduction.
In addition to the tax forms listed above, four of the most common other ones you may need are (no matter what type of entity you are):
1040 ES - Estimated Tax for Individuals
Form 4562 - Depreciation and Amortization
Form 4797 - Sales of Business Property
Schedule D - Capital Gains and Losses (if you sold any business property)
This list may not be complete. You may need additional forms or schedules. I just listed the most common.
Any income you receive will be reported to you on a Form 1099 Misc. - Miscellaneous Income, in box 7, Nonemployee Compensation. You will not get a W-2, as you are not an employee, even if you have your truck leased to a company. Note: when you started a new job as an employee, you were required to fill out a form W-4, Employee's Withholding Allowance Certificate. As a self-employed person, you will have to fill out a form W-9, Request for Taxpayer Identification and Certification. You will have to fill one of these out for each company you lease your truck to, or if you have your own authority, each business you receive any income from. The total of all the amounts on all your 1099's is your gross income.
There are two reasons to keep track of your miles. As I said, I use Quicken, and I just enter my miles as though they were an expense, and the name of the state as a category, and Quicken will total my miles by state. Fuel purchases can be done the same way.
Your license plates for your tractor under the IRP (International Registration Plan),may be based on weight, cost of the tractor when new (even if you bought it used), your purchase price, and miles run in each state, even if it is only one mile, your total miles, and which states you want to haul in for the year you are purchasing the plates.
If you are paying your own fuel taxes, you need to keep track of how many miles you run in each state, and of course your total miles. You also need to record how many gallons of fuel, and/or the cost of fuel for each state you ran in. You need the total miles for each state even if it is only one mile.
It has been a long time since I bought permits. The company I am leased to buys my permits, so I can't tell you anything about them. So much has changed since I bought my last one. It used to be that each truck had a card to carry and that card had 50 little squares drawn on it. For each state you wanted to run in, you had to buy a stamp and put it in the proper square for that state. These were called bingo cards and bingo stamps. Each stamp has been replaced mostly with a one sheet computer print out.
If you want to haul alcohol (beverages), including beer, you need additional permits.
Many states also used to require you to buy a license plate in addition to the bingo stamps. Look at some pictures of trucks from 30 or more years ago, and you will see up to a dozen license plates hanging off the front bumper. There might have been another 12 to 15 stickers on the side of the truck that various states required you to have. These have mostly been replaced with the IFTA (International Fuel Tax Agreement) sticker, the HUT (Highway Use Tax) sticker, the ICC MC number, and the USDOT number see "Definitions and Industry Terms"
Just because a lot of the plates and stickers have been eliminated doesn't mean the permits or taxes have been.
All I can advise you about state permits if you need to buy your own, is to contact OOIDA or each state to find out what you need and how to get it, and what records you will need to keep. Many states are online and you can download applications and all kinds of information, while other states barely list a phone number.
If you are thinking of taking a home office deduction, be very careful. It used to be if you had a certain place in your home where you did your bookkeeping, you could take an in-home office expense. You can no longer do that unless you actually generate income, usually by having people come in, and it has to be used exclusively for business - you can't use part of your living room as a office. Deducting a home office is high on the list of triggers for an audit.
You also need to estimate what you will be netting each quarter and pay estimated income taxes to the IRS, and your state tax department. Failure to pay enough estimated taxes could result in a penalty and interest on the amount due from the time you failed to pay it.
Meals for people working under the "hours of service" (basically log books), have special rules.
The IRS knows that food costs more in some places than it does in others, so they give different rates for different cities. For the ordinary traveler, this doesn't present much of a problem, but the truck driver who is in several different places every day, it does. That is why the IRS allows transportation workers to figure their meal expenses differently.
There are two ways you can track your meal expenses. You can keep a receipt for each meal, cup of coffee, snack cake, and bottle of soda you buy (a real headache!), or you can "flat-rate" them.
If you choose to flat rate them, the IRS allows you $66.00 a day for meals, but you are only allowed to take 80% of that ($52.80). Are you beginning to see how complicated bookkeeping is?
Now you can not take $52.80 for every day you get in the truck. You must be gone long enough to require a "rest period", and be away from your "tax home". This means that if you drove your truck to pick up a load 10 miles from where your business is, and it took you 7 hours (pre-trip, fueling, driving, loading, returning), you could not take a meal allowance, even though you may have bought a meal. There are two reasons you could not take the allowance: 1) you were not gone long enough to need adequate rest, and 2) you were not away from your tax home.
Keep your log books, as they are needed to figure the number of days you can take a meal allowance.
So, how do you actually figure your expenses? It doesn't matter if you do it by hand, or use a bookkeeping program. You need to set up categories for each expense: fuel, parts, labor (repairs), meals, tolls, taxes, licenses, interest, supplies, cell phone, pager, communications, motels, and so on - any expense you have. I have a "miscellaneous" category, but I try to put everything into a specific category. Be sure you record each expense on the proper date, backed up by receipts.
Keep a record of each deductible expense (truck, trailer, improvement), separately. Record the date, amount, trade in amount (if any), and what the expense was.
When you sell equipment, you need the above information, as well as the date of sale, cost of sale (including advertising or sales fee), and how much you sold it for, as well as the amount of depreciation previously taken.
If you have income from different sources you should separate these into categories, too.
A lot of companies are not putting fuel surcharges on the 1099's. Even though it is not being reported to you, it is still income to you and must be reported when you file your tax return.
Of course, as stated above, if you do your own permits, you need extra categories for the total amount of fuel purchased, amount of fuel purchased in each state, and all states you ran in, as well as the number of miles you ran in each state, and all the miles you ran.
And that's "all" there is to it!
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Resources:
Here are some tax publications to get you started. Look for:
Pub 17 Your Federal Income – information about meal deductions for those subject to hours-of-service
Pub 334 Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) – sole proprietor
Pub 463 Travel, Entertainment, Gift and Car Expenses (covers meals for the transportation worker)
Pub 541 Partnerships
Pub 505 Tax Withholding and Estimated Tax
Pub 509 Tax Calendars
Pub 535 Business Expenses
Pub 538 Accounting Periods and Methods
Pub 542 Corporations
Pub 544 Sales and Other Dispositions of Assets
Pub 551 Basis of Assets (What depreciation is based on)
Pub 560 Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
Pub 583 Starting a Business and Keeping Records
Pub 587 Business Use of Your Home (Including Use by Day-Care Providers)
Pub 946 How to Depreciate Property
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I am sorry for any inconvenience this may cause to my legitimate commenters.
1973 White Road Commander
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