2023 is almost over which means it’s time to make sure you have minimized your tax bill for the year. There are many things you can begin doing now to make filing your tax return as easy as possible and reduce the amount you owe. Let’s take a look at a few of the most important tax moves to make before 2023 comes to an end.
Whether you’ve been an owner-operator for all of 2023 or just part of 2023, we can help you get those complicated owner-operator taxes filed. Click here!
1. Buy Assets - ONLY if you Need Them
If you are in need of a new truck or piece of equipment for your business, it may be worth purchasing it before the year ends. Purchasing equipment for your business could allow you to reduce your tax liability because of the depreciation rules.
The tax law allows your business to take an immediate first-year deduction on any asset purchased during the year. This is because any qualified property that was purchased and placed in service between September 27, 2017, and December 31, 2022, could have been depreciated by 100% of the cost of the property. If the tax law doesn’t change, then starting in 2023, the bonus depreciation goes down by an additional 20% each year. This means that in 2023 bonus depreciation will be 80%, 2024 will be 60%, 2025 will be 40%, 2026 will be 20%, and in 2027 there will be no bonus depreciation. The cost of the depreciated piece of property will be recognized as an expense and lower your taxable income.
But, before you go out and make a big purchase in order to take advantage of the new depreciation rules, there are a few things to consider.
This deduction shouldn’t motivate you to purchase things that you might want but won’t help your business make more money.
A higher deduction in the present means you will likely have a lower deduction in the future. If your business is growing, this can lead to problems when your business moves into a higher tax bracket.
If an asset is sold for more than its adjusted basis*, then tax law states any excess depreciation that was deducted on the prior year's returns (up to the amount of the sale price) is considered taxable income. This means if you end up selling an asset for more than its adjusted basis, tax law requires the IRS to take back the depreciation deduction and the recaptured depreciation profits will be taxed as income.
2. Calculate your Per Diem Deduction
Per diem is the tax deduction that the IRS allows to substantiate ordinary and necessary business expenses paid or incurred while traveling away from home. In simpler terms, it’s a deduction for meals and incidental expenses for the days you are on the road and away from home for a period of time that requires sleep or rest to complete your job duties. This deduction was eliminated for employees also known as company drivers under the Tax Cuts and Jobs Act (TCJA) but remains a deductible business expense for self-employed individuals or owner-operators.
The current rate for 2024 (last updated October 1, 2024) is $80 per full day and $60 per partial day.
IMPORTANT NOTICE: The Per Diem rate from January 1, 2024 - September 30, 2024, was $69 per day in the Continental United States. This means you will need to calculate your total Per Diem deduction using two different Per Diem rates. You need to keep this in mind when you are filing your 2024 taxes.
Taxpayers are required to keep track of their days on the road in order to claim the per diem deduction. ATBS recommends keeping a per diem calendar where you mark an “X” for full days and a “/” on partial days to keep tracking per diem simple. To prove your per diem, you will also need to provide DOT ELD logs with times, dates, and locations.
To get a better understanding of Per Diem, check out our Per Diem Tax Break article.
3. Consider Getting Taxed as an S-Corporation
Consider setting your business up as an LLC and filing form 2553 to elect to be taxed as an S-Corporation. There are some advantages to filing a 1120S, as long as you net enough earnings throughout the year. ATBS recommends not making this election unless your net earnings are consistently exceeding $70,000-$75,000 per year. At that point, tax savings will be greater than the costs to set up and run the corporation.
As an S-Corp, you can minimize your self-employment tax by paying yourself a reasonable salary and withdrawing additional funds as distributions. Unlike a sole proprietorship, not all income (distributed and undistributed) from an S corporation is subject to self-employment tax. The self-employment tax rate is approximately 15% on all earnings from self-employment activity.
Here is an example of how you can lower your self-employment taxable income when set up as an S-corporation. If you earned $60,000 of net income over the year, and pay yourself a reasonable salary of $40,000, you only have to pay self-employment tax on the $40,000. 15% (the self-employment tax rate) of $40,000 is $6,000. This means that you are now only paying $6,000 of self-employment tax rather than $9,000 (15% of $60,000 is $9,000). Paying yourself a salary that is not considered “reasonable” may send a red flag to the IRS that could potentially trigger an audit.
4. Get Caught Up on Quarterly Tax Estimates
If you have not been paying your quarterly estimated tax payments, it would be a good idea to make a larger than normal 4th quarter tax payment to try and catch up. This will help pay any existing tax liability due when you file your 2023 tax return. It will also allow you to avoid penalties for not paying enough taxes during the year. The 4th quarter estimated tax payment is due January 17th, 2024.
Generally, most taxpayers will avoid a penalty for underpayment of annual tax if they owe less than $1,000 or if they’ve paid at least 90% of the tax due for the current year. However, it’s HIGHLY recommended you pay taxes every quarter. Failing to pay your quarterly estimated taxes can result in additional penalties that vary based on how much you owe.
Don’t let yourself get too far behind or it will become more and more difficult to get yourself caught up. ATBS recommends setting aside 25%-30% of your weekly net income for quarterly estimated tax payments.
5. Make an Individual Retirement Account (IRA) Contribution
Contributions that you make towards a traditional IRA are considered tax deductible with some restrictions. You can contribute up to $6,500 per year across all IRA’s in your name and if you are over the age of 50, you can make an additional $1,000 contribution for a total of $7,500 per year. These contributions have to be made before April 15th, 2024.
Additional retirement plans you can contribute to include a simplified employee plan (SEP) or a savings incentive match plan for employees (SIMPLE).
A SEP has special rules attached to it, so if you have employees, make sure you understand the contribution rules. If you are the only employee of your company, then you can contribute 25% of your net income from self-employment activity, or $66,000; whichever is less.
If you are a single truck owner-operator, or your company has fewer than 10 employees, you can use a SIMPLE IRA. Your annual contributions are capped at $15,500 unless you are 50 and older when it’s increased to $19,000. Find a trusted financial advisor to help you determine which method of investing for retirement is best based on your individual income needs.
Additional Tips
Max Out Health Savings Account
A health savings account (HSA) lets you set aside pretax income to cover health care costs that your insurance doesn't pay. You can contribute to an HSA only if you have a high-deductible health plan (HDHP) and aren't enrolled in Medicare. For 2023, the maximum contribution amounts are $3,850 for individuals and $7,750 for family coverage. If you're 55 or older, you can add up to $1,000 more as a "catch-up" contribution. HSAs have no use-it-or-lose-it provision. Any funds still in the plan at the end of the year can be rolled over indefinitely.
Send Books to Accountant
At the end of the year, one of the best ways to get ready for the upcoming tax season is to send your books to an accountant. This way they can begin getting everything in order early and let you know with plenty of time if they are missing any items. If you wait until later in the tax season, it could mean that your taxes may not get done before the deadline.
Prepare 1099’s for Contractors
The 1099-NEC form is now used to report payments made to independent contractors for services. If you paid someone who is not your employee (W-2), such as a subcontractor, $600 or more for services provided during the year, a Form 1099-NEC needs to be completed. A copy of the 1099-NEC must be provided to the independent contractor and the IRS by January 31 of the year following payment.
Calculate Health Insurance Payback for Underestimating Annual Income
The 2018 tax year was the last year there would be a penalty for not having health insurance. However, this doesn’t mean that federal marketplace health insurance options and plans were eliminated. When you apply for health insurance through the federal or state marketplace or exchange, you need to estimate your family income for the year. If your income is below a certain amount, you may be eligible to receive a subsidy to help you pay your monthly insurance premiums. At the end of the year, you need to calculate how much your household income actually turned out to be. If your income is above the amount you estimated, you may have to pay back some or all of the subsidized assistance you received back to the marketplace as part of your tax liability.
It’s recommended that you talk to a tax professional if you need any help with any of the above items. At ATBS, we specialize in owner-operator truck driver taxes. We can walk you through each scenario above to make sure your 2023 taxes are filed correctly. Give us a call at 866-920-2827 to get started!
