In December 2017, Congress passed one of the largest tax reform bills since the 1980s. The Tax Cuts and Jobs Act will affect owner-operators starting this year, and continuing through at least 2025. At that point, certain parts are scheduled to expire, unless they are renewed by Congress.
The goal of this tax legislation was to help simplify the entire tax filing process. Unfortunately, many of the changes added an extra layer of complexity. Within this article we’ll hopefully clear up some of the questions you might have surrounding the changes to the IRS tax code.
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 a 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.
Have you been considering a move from a sole proprietorship to an S-corporation? If so, now might be the perfect time. In Table 1 below, we compare two different owner-operators and how the new tax law could impact their tax liability. One is set up as a sole proprietor and the other as an S-corporation.
Based on the above table, you can see that both owner-operators had gross revenue of $150,000, and both incurred reasonable business expenses of $90,000 throughout the year. The member of the S-corporation is responsible for the employer's share of Social Security and Medicare, which added to $3,060. In the end, the S-corporation realized a net income of $4,940 while the sole proprietorship had a net income of $48,000.
In Table 2, below, you’ll see how the income generated from the entity is passed along to each individual tax return. The sole proprietor will get to deduct the $3,391 that he paid toward self-employment taxes. In addition, the S-corporation will receive a QBI deduction of $988 while the sole proprietor will receive a deduction of $9,600.
The end result is that the business structured as an S-corporation will have a taxable income of $31,952 while the sole proprietorship will have taxable income of $23,009.
We know what you might be thinking. Since the taxable income for a S-corporation is greater than that of a sole proprietorship, there is no reason to incorporate your business.
But when you take a look at Table 3, below, you will see that based on our scenario, the S-corporation would save $2,649 in taxes.
Key Takeaway: Owner-operators earning over $60,000 per year may benefit from incorporation.
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.
Key Takeaway: If you’ve been considering purchasing a new truck or trailer, now might be the best time to do it and take the 100% depreciation.
Tax Reform Doesn’t Stop There
The Tax Cuts and Jobs Act is nearly 1,100 pages long. Most of you won't want to take the time to read any of it. That’s why the tax professionals at ATBS did the dirty work for you. We read all 1,097 pages and summarized how it could affect you as an owner-operator.
Finish your taxes today. ATBS "Rumblestrip" service packages have helped over 150,000 truckers to keep their business and their taxes on track.