A Guide to the Qualified Business Income Deduction

screenshot of the Section 199A page on irs.gov

In 2017, there were major changes to tax law. The Tax Cuts and Jobs Act included reductions in tax rates for businesses and individuals, increasing the standard deduction and family tax credits, eliminating personal exemptions, and making it less beneficial to itemize deductions, limiting deductions for state and local income taxes and property taxes. 

With these reductions of tax rates for businesses, it was felt that this would be very fair for small businesses. Most small businesses are set up as pass-through entities. This is where the income tax is passed through the entity and the tax responsibility is left on the owner or owners as individual taxpayers. To level the playing field, Section 199A was added to the Act.

 

What Is Section 199A?

Section 199A details an individual taxpayer deduction for qualified business income. It is called the Qualified Business Income Deduction. This deduction allows eligible self-employed and small business owners to deduct up to 20% of their business income, REIT dividends, or qualified publicly traded partnership (PTP) income on their individual tax returns. The Qualified Business Income Deduction lowers your taxable income, which is the amount used to determine how much you owe in taxes. Unless changes to this law are made, it is to be available for tax years 2018-2025.

The 20% Qualified Business Income Deduction is calculated as the lesser of 20% of the taxpayer’s qualified business income, plus (if applicable) 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income or 20% of the taxpayer’s taxable income minus net capital gains. The 20% deduction reduces federal income tax but not Social Security or Medicare taxes. It also does not reduce self-employment tax.

 

Who Qualifies for the Qualified Business Income Deduction?

The 199A deduction is provided for sole-proprietorships, partnerships, S-corporations, trusts, or estates. Income from C-corporations, any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners or services you performed as an employee of another person or business does not qualify. 

This does not mean that any business income from these entities qualifies for the 20% deduction. This deduction comes with significant qualifications. This is what they call an “above-the-line” deduction, so it does not matter if you take the standard deduction or if you itemize on a Schedule A. The deduction is only for pass-through entities and qualified business income from these entities. It is not available for wage income and can be limited by which type of business in which you are engaged, your taxable income, W-2 wages paid, and the unadjusted basis immediately after acquisition of qualified property.

The Qualified Business Income Deduction is the net number of qualified items of income, gain, deduction, and loss from any qualified trade or business. This includes but is not limited to the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans. The Qualified Business Income Deduction is the taxable income that comes from a domestic business. If a business has both domestic and foreign income only the domestic income qualifies.

 

What Does Not Qualify For the Qualified Business Income Deduction?

The Qualified Business Income Deduction does not include items such as:

  • Items that are not properly includable in taxable income
  • Investment items such as capital gains or losses or dividends
  • Interest income not properly allocable to a trade or business
  • Wage income
  • Income that is not effectively connected with the conduct of business within the United States
  • Commodities transactions or foreign currency gains or losses
  • Certain dividends and payments in lieu of dividends
  • Income, loss, or deductions from notional principal contracts
  • Annuities, unless received in connection with the trade or business
  • Amounts received as reasonable compensation from an S corporation
  • Amounts received as guaranteed payments from a partnership
  • Payments received by a partner for services other than in a capacity as a partner.
  • Qualified REIT dividends
  • Publicly traded partnership (PTP) income

There is a safe harbor rule for 199A purposes available to individuals and owners of pass-through entities who seek to claim the deduction under section 199A with respect to a rental real estate enterprise. Under the safe harbor, a rental real estate enterprise will be treated as a trade or business for the purposes of the Qualified Business Income Deduction if certain requirements are met.

Also, there are income limitations to qualify for the deduction.

 

2020 Qualified Business Income Deduction Income Thresholds

 

Filing StatusIncome Threshold (limit for the full deduction)Income Limit for a partial deduction
Single$163,300$213,300
Head of household$163,300$213,300
Married filing jointly$326,600$426,600
Married filing separately$163,300$213,300

 

If you are below these thresholds, it is very straightforward and you should qualify for the 20% deduction on your taxable business income. 

If you are above these limits, it gets confusing as to who qualifies and who does not. Above those limits, your ability to claim the deduction depends on the precise nature of your business. Even if your business qualifies, you may not get to enjoy the full 20% break as the deduction phases out for certain types of businesses.

 

Determining If Your Business is an SSTB

If the business owner’s taxable income is above the income limits, you will need to determine if the business is a specified service trade or business (SSTB). An SSTB is a trade or business involving the performance of services in the fields below:

  • Accounting
  • Actuarial science
  • Athletics
  • Brokerage services
  • Consulting
  • Financial services
  • Health services, such as performed by doctors and nurses
  • Investing and investment management
  • Law, including lawyers
  • Performing arts
  • Trading

Many businesses offer a multitude of services or products. A business will not be considered an SSTB if less than 10 percent of the gross receipts, (5 percent if gross receipts are greater than $25 million) of the trade or business are attributable to the performance of specified services. 

Many business owners are trying workarounds to restructure their businesses by splitting up their business into two or more entities with the same owner to separate the SSTB income and non-SSTB income and avoid missing out on part or all the Qualified Business Income Deduction. 

To prevent this workaround there are set rules that if a non-SSTB has 50% or more common ownership with an SSTB and the non-SSTB provides 80% or more of its property or services to the SSTB, the non- SSTB will by regulation be treated as part of the SSTB.

 

What If Your Taxable Income is Above the Threshold?

If your taxable income is equal to or higher than the threshold, your maximum possible deduction is subject to limitations. How much you can get will decrease based on your income. 

The deduction considers multiple factors, and the instructions will walk you through them. If the income is from a specified service trade or business (an SSTB), it does not qualify for the deduction once it passes the maximum threshold. 

If you are between the thresholds and an SSTB, the deduction will be phased out until it no longer exists. If you are not an SSTB and you go over the phase-in range, your deduction could be limited by your W-2 wages paid or the UBIA of qualified property held by a trade or business.

There are many more factors that affect a taxpayer’s qualifications for the deduction and factors that set limitations on the percentage one can deduct. The IRS has noted that 95 percent of small business owners will fall below the thresholds and not have to worry about the limitations. If you are below the threshold, you would use IRS Form 8995 (Qualified Business Income Deduction Simplified Computation). 

If your taxable income is more than the income threshold then you would use IRS Form 8995-A (Qualified Business Income Deduction). Both of these forms take you through the process of adding up your qualified business income, qualified REIT dividends, and qualified PTP income. This will determine the amount of your deduction.

 

Are You Taking Advantage of the Deductions Available to You?

I am sure many questions are still left unanswered. This is one of the most complex tax laws not only from the 2017 Tax Cuts and Jobs Act but in all of the tax codes. The IRS website provides a lot more information if you’d like to dig in further.

The Treasury Inspector General for Tax Administration has identified nearly 900,000 returns filed for 2018 that did not take the Qualified Business Income Deduction even though it appeared that they qualified. In my past articles, I have always recommended that a taxpayer seeks advice and assistance from a true tax professional. 

When it comes to the 199A deduction, it is imperative that a business owner has the correct tax professional assisting them especially if they are above the limitations. Enrolled Agents, CPA’s and Tax Attorneys can make sure you are not missing out on this valuable deduction and formulate strategies in the operation of the business that will increase the likelihood of you being able to benefit from the Qualified Business Income Deduction. Most importantly, as complex as it is, they can make sure that your tax return is filed correctly so that you get the correct deductions and don’t have to worry about a future IRS examination or an IRS audit.

 

What You Can Deduct from IRS, State, and Local Taxes

a 1040 tax return

When filing your taxes there are many ways to reduce your tax bill or ways to get yourself a bigger refund. This can happen using different credits and deductions that are available. 

This article will discuss different tax deductions that can be used on your tax return to reduce your taxable income. I will start off by discussing the choice of either using the standard deduction or itemizing your deductions. I will also discuss above the line deductions which can be used in addition to the standard deduction.

 

What is a Tax Deduction?

A tax deduction is a deduction that lowers a person’s or organization’s liability by lowering their taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be applied against or subtracted from their gross income to figure out how much they owed. There is always confusion about the difference between the deduction and a tax credit. Remember a deduction reduces your taxable income while a credit directly reduces your tax bill.

On a tax return, you can either take the standard deduction or you can itemize your deductions. You cannot do both. When making the decision to itemize your deductions or to take the standard deduction it is especially important that you evaluate your situation thoroughly to see which will better benefit you. 

It is much easier to take the standard deduction but if you qualify for many deductions the choice to itemize can equate to many tax dollars saved so take your time to review the different deductions that are available and which ones that you qualify for. If these deductions that you qualify for are greater than the standard for your filing status, then you have the answer to your question. 

Having a true tax professional to assist you in reviewing your situation to make this decision is recommended. I will start off with the standard deduction so you have the information on that choice to compare to the breakdown of the possible itemized deductions that you could qualify for.

 

What is the Standard Deduction?

The standard deduction is the portion of income not subject to tax that can be used to reduce your tax bill. Even if you have no other qualifying deductions the IRS allows you to take the standard deduction no questions ask. In the past, the decision to take the standard deduction or to itemize was much more difficult. In 2017, with the Tax Cuts and Jobs Act, the standard deduction was almost doubled making this decision much easier. This will remain in effect for 2018 through 2025. 

The amount of your standard deduction now is based on your filing status, age, and whether you are disabled or claimed as a dependent on someone else’s tax return. The standard deduction adjusts every year based on inflation. The allowable standard deduction for 2020 and 2021 is laid out below as seen on Nerd Wallet.

Filing status2020 tax year2021 tax year
Single$12,400$12,550
Married, filing jointly$24,800$25,100
Married, filing separately$12,400$12,550
Head of household$18,650$18,800

The standard deduction is higher for taxpayers who are 65 and older at the end of the year and/or blind. This extra deduction applies to taxpayers and spouses if married.  Increase the standard deduction by the following for each occurrence of the conditions above. 

For married filing jointly, married filing separately or qualified widow there would be an increase in the deduction by $1300 for 2020 and $1350 for 2021. 

For single or head of household filers, the increase would be $1650 for 2020 and $1700 for 2021. 

If a taxpayer is claimed as a dependent on someone else’s tax return is limited to the greater of $1,100 in 2020 or the individual’s earned income for the year plus $350.

 

Tax Deductions You Should Itemize

Itemized deductions are expenses that can be subtracted from adjusted gross income to reduce your taxable income and therefore reduce the amount of taxes owed. Such deductions would permit those who qualify the ability to pay less in taxes than if they had taken the standard deduction. Itemized deductions are listed on Schedule A of Form 1040. If you decide to itemize you must save all receipts in case the IRS decides to audit you because they can request proof. 

There are many different deductions that one may qualify for. If the amount of these deductions that you qualify for are more than the standard deduction and you have proof of all these deductions, then you should itemize.

State and Local Taxes

Taxpayers can deduct state and local real estate, personal property, and either income or sales taxes. For taxes 2018 through 2025 this deduction is limited to $10,000.

Mortgage Interest

Taxpayers can deduct home mortgage interest on the first $750,000 of mortgage debt. Homeowners can only deduct mortgage interest on home equity loans if the debt was used to buy, build, or substantially improve the taxpayer’s home that secures the loan. Homeowners may deduct mortgage interest on the primary and secondary properties.

Charitable Contributions

Taxpayers are allowed to deduct charitable contributions up to 60% of the adjusted gross income.

Medical Expenses

A taxpayer can deduct unreimbursed medical expenses that are more than 7.5% of their adjusted gross income for the tax year.

Long-Term Care Premiums

Long-term care insurance premiums are tax-deductible to the extent that the premiums exceed 20% of an individual’s adjusted gross income. There is a deduction limit based on your age and the insurance must be qualified.

Gambling Losses

A taxpayer can deduct gambling losses only to the extent of their winnings. You can not deduct more than you win.

IRA Contributions

A taxpayer can deduct qualified IRA Contributions from a Traditional IRA. The amount of the deduction may differ if a taxpayer or their spouse has a 401k as well.

Self-Employment Expenses

A self-employed taxpayer can deduct 50% of the amount that they are paying in self-employment taxes.

Student Loan Interest

A taxpayer can deduct up to $2500 of the interest paid on a student loan from their taxable income.

Casualty and Theft Losses

Any casualty or theft loss incurred because of a federally declared disaster can be reported on a Schedule A. Unfortunately, only losses of more than 10% of the taxpayer’s adjusted gross income are deductible.

Moving Expenses

If a taxpayer is in the military and the move is permanent and was ordered by the military then they can claim a deduction on unreimbursed moving expenses. They can claim travel and lodging expenses, the cost of moving household goods, and the cost of shipping cars and pets.

Educator Expense Deduction

If a taxpayer is a schoolteacher or other eligible educator, they can deduct up to $250 spent on classroom supplies.

 

Tax Deductions That Have Been Limited or Eliminated 

Many commonly used and well know deductions have been recently eliminated or limited. In the past, an employer could reimburse a taxpayer up to $20 a month tax-free for bicycle commuting expenses. There were also employer-related deductions for parking, transit, and carpooling. The 2017 Tax Cuts and Jobs Act suspended these benefits. 

Another common deduction was the expenses from a move. In the past when a taxpayer relocated for a new job, they could use the expenses not only from the cost of moving their possessions but the cost of travel as well. Beginning in 2018 this deduction is only allowable for specific situations and only allowable for taxpayers in the military. 

Also, in the past, a taxpayer that made alimony payments was able to receive a deduction for alimony paid and the person receiving the alimony would include the money as taxable income. With any divorce decree beginning in 2019 the payer will no longer receive a deduction and the spouse receiving no longer must claim alimony as income. 

The medical expense deduction has not gone away but the threshold has changed so that the expenses must exceed 7.5% of your adjusted gross income. In years past the threshold was 10%. 

The Tax Cuts and Jobs Act also set limitations on SALT Tax deductions. SALT Tax is state and local taxes. In the past the amount that a taxpayer could deduct was unlimited. Now the SALT deduction is limited to $10,000. 

 

Understand Which Tax Deductions You Are Eligible For

In conclusion with the rise in the standard deduction and the limitation in many of the itemized expenses the decision of which method to utilize has gotten easier but it is still difficult. Also, with the many recent changes, it is especially important that you understand what you are eligible for and what you are not if you are thinking about itemizing overtaking the standard deduction. Unless a taxpayer has mortgage interest and property taxes, significant charitable gifts, or a major medical event it would probably make more sense to take the standard deduction. 

As I always recommend when filing taxes and tax planning, it will always benefit a taxpayer to consult with somebody that has the knowledge and licensing to correctly advise them. An Enrolled Agent and a CPA (Certified Public Accountant) are the tax professionals that have the educational background to best advise a taxpayer.

 

When to Use Standard vs Itemized Deductions

adding tax deductions on a tax form

When it comes to choosing between standard versus itemized deductions, it involves simple math and understanding which deduction works best for you.

There are often mixed feelings when tax filing season arrives. For some individuals and businesses, the thought of filing a tax return isn’t so pleasant, especially when they’ve made quite a bit of money over the past year. For others, tax time is rewarding, with an expectation of a large refund. It all depends on how your income tax situation looks and the choices you make when filing your income tax return.

But before you file, one thing is for certain, it’s smart to understand all your options to receive the best possible outcome. A great deal of your outcome depends on how you add your deductions. There are two ways: The standardized deduction and the itemized deduction route. Both have positive and negative aspects.

 

What Are Tax Deductions?

A tax deduction basically lowers an individual or a company’s liability by reducing taxable income. As many organizations and individuals wait until the end of the year to settle tax debts, deductions are important for offsetting the yearly gross income.

Income that isn’t taxed during the year will come for collection when it’s time to file income tax returns. The company or individual’s work expenses must be factored into the owed taxes to calculate what’s actually due. Since purchases are acquired and bills are paid during the tax year to keep the business running, these expenses must be recorded against taxes due. This is why deductions are good news for the business.

And taxpayers have a choice in how to record deductions. You can either choose the standardized deduction, a number used as a set deduction for simplified tax purposes, or the itemized deduction, where every expense is recorded individually. One may save you more money than the other. This is important to any taxpayer at the end of the year.

 

Why Tax Codes Differ

Different tax codes are depending on the region where you live. These codes vary at the state or federal level. Tax code standards are set on an annual basis for both the federal and state governments.

The federal government often sets tax deductions in a certain way hopeful that taxpayers will get involved in bettering society through community service. There are also tax deductions for stocks as long as they are owned for investment reasons. They are counted as a realized capital loss.

Rare deduction options

Before delving into the two basic deduction types, it’s important to be aware of an uncommon deduction option for rare circumstances. A tax loss carryforward is a capital loss not included in either standardized or itemized deductions. It’s the only exemption in the tax laws. The tax loss carryforward benefits the taxpayer as earnings are rearranged and carried from previous years. As far as capital losses, you can claim $3,000. This is as of last year.

 

Standardized vs Itemized Deductions: What’s the difference?

Tax deductions, as mentioned, come in two major forms, with rare exceptions for tax loss carryforward. These two deduction options provide ways for individuals and organizations alike to discover the best way to apply their expenses to income tax returns.

Standardized Deductions

In simple terms, a standardized deduction is a set number, and itemized is a list of all individual or organizational expenses, but to grasp the concept there’s more you need to know.

Standardized deductions in the United States change from year to year and are the deductions offered to individuals by the federal government. Tax laws are also different in each state offered at the state tax level. These tax laws can also change where needed each year.

With standard deductions, there are no calculations needed as the amount is already determined. It’s usually considered the easier route, as individuals or organizations can shorten tax filing time with a set deduction. While many organizations choose the itemized route, most individual taxpayers choose the standard route.

Itemized Deductions

With itemized deductions, there’s more work, as each expense or loss is looked at individually. In this case, calculations are necessary to determine the right amount of the deduction, or square footage of some home offices, a portion of utilities, and so forth.

You can only choose the itemized deduction route if your expenses are more than the standardized allotment. The most benefit with using itemized deductions comes from numerous large expenses that are certain to add up to be more than the standard figure provided by the federal government and approved through individual state laws.

 

When to Use Standardized Deductions

If you’re confident that your deductions are less than the standardized amount allowed by the federal government, you should use the standard route. You can use one of three standardized deductions depending on your filing status. These include:

  • Married, filing jointly, or widow- $24,800
  • Married or single filing separately-$12,500
  • Head of Household-$18,650

Pros and cons of standardized deductions

Standard deductions can be used by anyone, and they’ve proven beneficial to those without mortgages or low-income families. With this deduction, there is no tracking of expenses, and no pressure to provide documentation of any kind.

 Another good thing about the standardized deduction is that some individuals qualify for larger than usual amounts, like the disabled or people of a certain age. If you are blind or over the age of 65, you qualify for an additional amount between $1,300 and $1,650. The reason for this addition is because those with disabilities or mature in age have additional medical or psychiatric needs at times. This extra deduction amount can help exponentially during tax time.

The only issue with this deduction is that you might not get as much money as the itemized deductions allotment, or there could be filing limits on your standard amount. These limits are few but important to remember.

  • If you’re married and your spouse files using itemized deductions, you cannot receive the standard deduction amount.
  • In more rare circumstances, like if you’re filing for under a year because of new citizenship, this deduction isn’t available.
  • If you’re a nonresident alien or dual citizen, you cannot get a standardized deduction either
  • And, of course, if you’ve filed on another individual’s tax returns, you cannot receive this deduction. But this is a given.

When to Use Itemized Deductions

Itemized deductions can be used in various circumstances or for certain expenses. Several situations qualify for itemized deduction according to the federal government, like retirement funds, or when you’re filing jointly with a spouse. The qualifying deductions are as follows:

  • Home mortgage interest
  • Home office expenses and other freelance work deductions
  • Recorded and calculated charitable donations
  • Non-profit organization donations
  • Religious donations such as tithes
  • Government organization payments
  • Business expenses, such as travel costs and meals
  • Networking expenses, physical and online business meetings and, etc.
  • Annual tax and sales tax on personal property like cars and homes.
  • Healthcare, Dental, prescription drugs, and medical bills
  • Property taxes

Stipulations on Itemized Deductions

There are certain limits on how much you can count on itemized deductions. A threshold is set by the federal government for these expenses. Medical expenses, for instance, must be more than a certain percent of your adjusted gross income. You cannot itemize a few prescriptions and a couple of medical bills to qualify.

As an example, last year’s expenses had to be more than 7.5 % of an individual’s AGI. If you file your income taxes, you must be aware of this year’s percentage. So, it’s best to have this information at hand before tax time arrives. If using an accountant, they are aware of this information so there’s no concern. An accountant can help you decide which deduction is best for you if you’re unsure.

Pros and cons of itemized deductions

The obvious positive aspects of itemized deductions are the numerous deductions allowed and the opportunity for a better tax refund outcome. Itemized deductions often count in your favor, decreasing or eliminating owed taxes, or even awarding a nice large refund to individuals or companies. You can save more money according to your tax bracket as well.

As lucrative as itemized deductions may seem, they do come with drawbacks. With itemized deductions, there is a large amount of paperwork to be completed. This requires tallying up expenses and gathering any needed documentation to account for each expense. It’s a manual process that takes energy and patience, even with a possible benefit in mind. Even worse, sometimes this manual work still results in a negative outcome. This is the largest drawback to using itemized deductions on tax returns.

Another downside to itemized deductions comes from The Tax Cuts and Jobs Act. This law limits state and local deductions to $10,000, even for taxes on the property. Also, If interest is taken out of home equity loans, except in cases of home renovations, this interest cannot be counted with itemized deductions. There’s a $75,000 limit on this deductible interest too.

 

Choosing Between Standardized and Itemized Deductions

It may not be easy to choose which type of deduction process you should utilize, especially if you’re on the threshold of multiple or large expenses. It’s sometimes difficult to be sure where you qualify. It’s so important to think about these options during the year and not wait until the last minute to avoid stress and frustration, even the possibility of choosing the wrong way.

If you’re not sure, seek a tax professional to help you understand your particular life situation and where you fit into the tax equation. With this information, you can effectively add your deductions and possibly save a lot of money in the long run.

 

Tax Deductions for Truck Drivers

truck driver owner-operator

Understanding how you and your trucking business are taxed is one of the biggest challenges for any owner-operator and truck driver. Using good planning and record-keeping all year round, though, can help you avoid any headaches in April. This guide will shed some light on truck driver taxes, deductions, and more.

 

How Much Tax Does a Truck Driver Pay?

Being an owner-operator means that you need to pay taxes yourself. This can be a major hurdle for those that were company employees before as they are now called to calculate and pay taxes that were once automatically withdrawn from their paycheck and then pay them to Federal and State agencies themselves. This involves making quarterly estimated tax payments that often range between 20-30% of their net income (the one earned per quarter). Doing so enables you to minimize any tax bill surprises while also avoiding tax penalties before Tax Day (usually in mid-April). In a nutshell, truck drivers need to pay three major types of taxes:

The first two are calculated on your tax return. If you are an employee, these taxes are being withheld from your check. Owner-operators will have to estimate and pay these taxes themselves. You can refer to >Tax-brackets.org to check cross-state tax brackets.

Now, when it comes to estimated tax payments, you will need to make quarterly payments if you owe more than $1,000 in taxes. This sum is, of course, the final amount you get after subtracting withholding and credits.

Note that owner-operators can show deductions or even file a tax return at the end of the year. So, estimating your business profit will show you (1) the required estimated tax payments you need to make, and (2) the due taxes when you file Form 1040. Your net profit is calculated with this equation:

Net profit = Gross pay (what’s on your 1099-MISC) minus allowable business-related expenses.

If you don’t file a tax return or show deductions, the IRS will determine what you owe in taxes without taking into account any potential deductions. This instantly means that the required tax amount will be significantly higher than if you had shown deductions or filed a tax return.

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We’ve helped many individuals just like you. Visit our Truck Driver Tax Help page to see how we can help you resolve your tax debt once and for all.

 

What Expenses Can a Truck Driver Write Off?

Let’s begin with Per Diem expenses, which refers to the assumed tax-deductible sum you spend on beverages, meals, and tips when on an overnight (always business-related) trip away from home. This one is deductible on IRS Schedule C for owner-operators and lowers your income and self-employment taxes owed on the return directly. Per Diem expenses are used by the majority of over-the-road truckers that are away from their home base most of the time as it saves them more money than gathering meal receipts. The only prerequisite is that you spend the night away from home.

Note, though, that you won’t be able to deduct your total Per Diem dollar for dollar. So, ensure you are familiar with the IRS regulations, though, as the laws and amounts change almost annually. According to the current rules, you can take 80% of the Per Diem expenses as a tax deduction.

Other accepted deductions are those referred to as ordinary and necessary business expenses. In general, these include:

  • Truck maintenance and supplies – You might be able to deduct these costs if you pay for them out of your own pocket (i.e., cleaning supplies, washer fluids, new tires, and oil changes). Note that if your employer reimburses you, you won’t be able to double-dip (hence, deduct these expenses).
  • Sleeper berth – Many truck drivers are not aware that they can deduct items from using a sleeper berth. These include first aid supplies, mini refrigerator, alarm clock, cab curtains, and bedding.
  • Electronic devices – You can deduct costs related to your cell phone from your tax return if you use it exclusively for work. CB radios and GPS units are also deductible costs.
  • Travel expenses – Besides overnight stay-associated expenses (including per diem and hotel rooms), you may also consider the standard meal allowance. This may vary per location, but the amount is higher for truckers due to the Hours of Service regulations. For the current amounts, check out IRS Publication 1542.
  • Professional association or union fees – Feel free to deduct fees you pay at a trucking industry organization or union from your taxable income.
  • Uniforms – If you need to wear a uniform and it is not paid for by your employer, then you can deduct the related costs. These include goggles, protective gloves, boots, and other specialized work gear. Also, when away from home, you may deduct cleaning expenses for your clothing.
  • Office supplies – These are deductible only if you use office supplies to keep track of your day or route and include from staples and maps to writing supplies, clipboards, and logbooks.
  • Depreciation – You can deduct specific property as expense (i.e., your truck(s)) if you use that property in service, per Section 179. Always consult a tax professional before determining how to deduct these expenses if you are an owner-operator, though. Deciding how to use the leveraged deduction when filing your taxes can be challenging. The standard (aka straight-line) depreciation for a new Class 8 truck either uses the accelerated depreciation or the multi-year formula.
  • Truck lease – The entire leasing amount of your monthly payments can be deducted. Note that you will probably see a higher deduction in the first 48 months due to depreciation. After three years or so, the truck purchaser will have little depreciation, which means that you will be able to see the reduced tax benefit. For the owner-operator who buys the truck, the tax delay is the net effect. In this case, the tax is not eliminated by depreciation – it is paid in the following years.
  • Other costs – These include expenses such as DOT physical exams, drug testing fees, driver license renewal fees, and sleep apnea costs.

 

Other Truck Driver Tax Write-Offs That You May Qualify For:

  • Lifetime Learning and American Opportunity tax credits – If you, your child, or spouse are attending college, you may qualify for partial reimbursement of the fees and tuition you pay for college provided that you have not received any scholarship or grant.
  • Child tax credit – You may claim up to $1,000 for every offspring that is below 17 as long as the child lives with you (at least most of the time), and you cover at least 50% of their living expenses.
  • Child & dependent care – You may receive compensation for some of the costs tied to dependent or child care if you have children below 13 years of age. In the case of disabled spouses and offspring, though, the age limit does not apply (eligible regardless of age).
  • Earned income tax credit – This is a refundable credit that is based on your income and covers low- and middle-income individuals and families. You could get $6,000 or more in reduced tax credit with this one.

 

What Tax Forms Should Truck Drivers Use?

Filing a Form 1099-MISC (Miscellaneous Income) is the responsibility of self-employed truck drivers. You need to report that income, along with any expenses, on the IRS Schedule C (Profit and Loss from Business). You will also have to report your self-employment taxes and report them on your form 1040 if your net earnings are at least $400.

You should have received a Form W-2 for your job if you are a truck driver/employee and none of your job-related costs are deductible. In detail, the forms you will need to file your taxes are as follows:

  • Schedule C form – For statutory and self-employed drivers. It determines your business profit and loss.
  • W2 – For agents or commission drivers. Your Statutory Driver box in your W2 may have been checked. This form is also received by company truck drivers with a report of income and wages of the driver.
  • Form 1099 – To report miscellaneous income and applies to truck drivers working as independent contractors for a company.
  • Form 1040 or 1040A – This reports your individual income tax return. It is the standard federal income tax form.
  • Other forms for reporting your income if you are owner-operator – It depends on your records.

 

Tips for Filing Truck Driver Taxes

Here are some more details and tips for filing your taxes:

  • Don’t throw away your receipts. Hold on to them for at least five years.
  • Know the specifics related to your truck driver-associated deductions. Ask a tax professional to review your accounts if you need extra help, so you don’t over-claim or miss out on these deductions.
  • Be diligent about record-keeping to avoid penalties.
  • You can visit the IRS Publication 583 page for information about record keeping and kinds of records that you may not have been aware of that you need to keep.
  • You may also find useful information at the >IRS Trucking Tax Center.
  • Try to minimize your taxes contributing to a SEP, IRA, or 401(k) frequently, tracking personal vehicle miles, and benefiting from the available credits and deductions. Of course, getting assistance from a tax professional with experience helping truck drivers will help relieve some of the headaches and burdens.

 

Having a Tax Home – A Key Requirement for Truck Drivers

Before you can claim a tax deduction, the IRS requires that you have a general area or city in which you work. This is referred to as a Tax Home and has nothing to do with where you reside. It is just the address you list on your tax returns and usually where all your mail goes to. This could be your personal residence, your business’ headquarters, or a dispatch center. The only prerequisite is that you contribute towards the selected tax home regularly while on the road, especially if you are an owner-operator using a residence as your tax home. 

Why do you need a tax home? To be able to deduct travel and business expenses. In other words, without a tax home, the IRS won’t allow you to claim certain long-haul expenses. Note that failing to have a tax home or contributing financially to the registered tax home can end up with you facing substantial penalties for underpaid taxes.

  

Tax Moves to Make to Reduce the Due Sum of your Tax Return

Here are some things you could do to help minimize the amount you will owe after filing your tax return. 

  1. Take advantage of the new depreciation rules

Purchasing assets for your business (i.e., a new piece of equipment or new truck) could enable you to benefit from the new depreciation rules and eventually reduce your tax liability. According to the tax law, any qualified property bought between September 27, 2017, and December 31, 2022, can be fully depreciated of the property cost. Just ensure you place in service the purchased asset within that time frame to take the first-year deduction on the purchased asset immediately. If things remain as they are today, then the depreciation bonus goes down by an extra 205 annually, starting in 2023 (so, 80% depreciation in 2023, 60% in 2024, and so on). Your taxable income will drop considering that the cost of the depreciated asset will be recognized as an expense. 

Important notice: Making big purchases should NOT be your first course of action to help get a deduction, especially if you are planning on buying assets that won’t bring you additional income. Also, remember that the higher the deduction today, the lower the deduction in the future (most likely). If your business slips into a higher tax bracket, this could be a problem. So, only make big purchases if you really need the asset to be bought. 

 

  1. Keep a Per Diem Calendar

The IRS allows truck drivers to prove necessary and ordinary business expenses incurred when traveling away from the home base. This deduction is called Per Diem and involves incidental costs and your meals for the days you were on the road. This applies to travels that require you to rest or sleep away from home to deliver on your job duties. Although this particular deduction is no longer an option for company drivers (employees), the TCJA (Tax Cuts and Jobs Act) left it open for owner-operators (aka self-employed individuals). 

The Per Diem rate is set at $66 for every day you are away from home for business and $49.50 per partial day (effective since October 2020). Take note, though, that the IRS only enables you to deduct 80% of the Per Diem rate. This means that you get a deduction of $39.60 for a partial day and $52.80 for a full day. 

So, to claim your Per Diem deduction, you must know how many days you have spent on the road. This is why it is critical that you keep track of these days (i.e., you can keep a calendar and mark “/” for partial days and “X” for full days). 

Important: Ensure you provide DOT ELD logs with locations, dates, and times to substantiate your per diem. 

 

  1. Set up your business as an LLC

Being an LLC and getting taxed as an S-corporation by filing form 2553 is something worth considering, provided you net more than $70,000 annually. You see, for a sole proprietorship, all income is subject to self-employment tax (approx. 15% of all earnings), both distributed and undistributed. This is not the case with an S-Corporation, where you can withdraw additional funds as distributions and pay yourself a reasonable salary to minimize your self-employment tax. The key term here, though, is reasonable. In any other case (you give yourself a huge salary), you may send the IRS a red flag and trigger an audit.

Here is an example to make this a bit clearer for you: 

Let’s assume that your annual net income is $55,000 and pay yourself a salary of $35,000. The self-employment tax rate is 15%. So, 15% of $35,000 is $5,250. This means that instead of $8,250 self-employment tax (15% of $55,000), you are now paying $5,250.

 

  1. Catch up with your tax payments

If you have fallen behind your quarterly estimated tax payments, it is a good idea to try to catch up before the end of the year. A great way to do that is by making a larger than normal quarter tax payment to help pay any due tax liability when you file your tax return. Remember that not paying enough taxes throughout the year will get you penalized. In general, taxpayers owing no more than $1,000 avoid a penalty for underpayment of the annual tax. The same applies to those that have paid more than 90% of the tax due for the current year. Nevertheless, we can’t stress enough the significance of paying your taxes every single quarter to skip additional penalties that could be quite high. 

Tip: You could consider setting aside 25% of your net income (the weekly) for your quarterly estimated tax payments. 

 

Key Steps to File Taxes Successfully and Save on Taxes

Staying organized is crucial if you want to give yourself a considerable payoff in your taxes. In doing so, make sure you keep a careful record of any job-related expenses you have because the money you spend while on the road for work can increase the sum you can get back from your taxes. That aside, here are three important steps every truck driver should take to get taxes done.

Step #1: Select the (Right) Form You Need to File

Company drivers must have already received a W-2 form, which reports their annual wages and income. The majority of truckers will need to use the details from the W-2 form to fill out either a 1040A or 1040 form for taxes. 

You could also consider form 1040EZ, which is a simplified version of the 1040 form, provided you meet certain conditions. For example, you need to choose NOT to itemize deductions and make no more than $100,000 annually. Also, you must have a tax status of married filing jointly or single. Before opting for the 1040EZ solution, though, take into account the trucking deductions that could help you save money. 

Owner-operators, on the other hand, may find it easier to report their income via a 1099 form that reports miscellaneous earned income. The 1099 form enables you to itemize work-related expenses and deduct them from your taxes. 

Step #2: Claim Work-Associated Tax Deductions

Truck driver tax deductions can save you some serious money (you pay less in taxes) as they allow you to reduce your adjusted gross income. We have already provided you with a long list of truck driver deductions you could be eligible for. You only need to calculate your adjusted gross income  and report it on your tax forms, which will be the only type of income that will be taxed. The lower your adjusted gross income, the less in taxes you pay. 

Step #3: File Your Taxes on Time 

That would be not after April 15. You can file your taxes either by traditional mail or electronically. So, by now, you must have finished all the required paperwork (more or less), added costs, and know whether you will be getting a refund or you need to send a check. Just make sure all this is done before the deadline. 

Extra Tips for Filing Taxes for Truck Drivers:

  • Mileage cannot be claimed at standard rates, though you can claim it as a deduction. 
  • Any expenses your employer reimburses are NOT considered tax deductions you could claim. 
  • Make sure you keep a properly updated record of your actual expenses. 
  • Know all the regulations related to filing taxes. Also, what deductions you can take. There are certain rules that apply to truck drivers who wish to claim deductions. 
  • Never over-claim deductions. 
  • Using tax software can help you file your taxes in a decent way. However, it can never match the job done by a tax professional.
  • Have a tax professional review your accounts to stay on the safe side and avoid penalties, especially if your income tax bracket has gone up recently. 

 

Truck Drivers, click here to get help with your tax problems.