While it's hard to believe we've already put three quarters of 2021 in the books, the key question for owner-operators and independent contractors at this point in time becomes the following: Is your business operation prepared for the end of the year? The bigger question may be this: Do you have a checklist for the top considerations for trucking businesses in 2021? In the early days of October, Trucker CFO Colton Lawrence took some time to talk about his 2021 business checklist for owner-operators. As you'll hear, it covers five key points that every owner-operator and independent contractor should consider in the final months of 2021.
TRANSCRIPT
Announcer:
Welcome back to The Trucker CFO Podcast. Thanks for connecting with us again here on PodWheels. In this episode of the podcast, we'll be talking once again with The Trucker CFO, Colton Lawrence. As the calendar turned to October, we spent some time with Colton discussing five important considerations that all owner-operators and independent contractors should keep in mind during the final three months of 2021.
Colton will once again be joined on the podcast by Greg Thompson, the Executive Producer of PodWheels. As you'll hear during their conversation, the topics noted in this podcast represent a business operations checklist as owner-operators and independent contractors work to finish out 2021 and head into 2022.
As always, Trucker CFO and PodWheels would like to remind our listeners to please keep in mind that every tax and business situation is unique. In addition, the perspective shared on this podcast should not be considered as tax advice. If you have questions regarding your specific tax situation, you should consult a qualified tax professional. At the end of the podcast, we'll be sharing information on how you can connect with Trucker CFO. Now let's join the conversation with Colton Lawrence and Greg Thompson. Colton connected to the PodWheels Studios through Zoom audio.
Greg Thompson:
We're back with The Trucker CFO Podcast and Colton, we're talking about the end of the year. I can't believe that we are now at the beginning of October, which makes it the fourth quarter of this year. Where did 2021 go?
Colton Lawrence:
It has flown by as do most of the years. It seems like the older I get, the faster time goes, but there is no better time to talk about what we're going to talk about today than right now.
Greg Thompson:
Okay. We're talking about a checklist at the end of the year and before we got the podcast rolling, I asked Colton to make a quick checklist of the things that we need to be thinking about here early October. Nine months in the books, three months to go and we've got 2022 to look forward to. So Colton, what is the number one thing on your checklist?
Colton Lawrence:
Well Greg, number one on my list for 2021 is per diem. Because of the recent changes, it will be necessary for independent contractors to break out the number of days that they were on the road. And it can become very frustrating if they wait until March, April, or even May of next year. If they don't have that already done, it can become a time-consuming process.
Greg Thompson:
And so just to review, and we put a blog post out on the Trucker CFO website, TruckerCFO.com, so check it out in detail. Let's talk about that for a moment now. Just to review, the rate has changed as of October 1 of this year going forward, but that means that there was an old rate that applied from January 1 through September 30th, correct?
Colton Lawrence:
That's right. So independent contractors are going to need to be able to tell us the number of days they were on the road from January 1st through September 30th and they will receive $66 per day during that time. We will then need a separate number of days on the road for the dates of October 1st through December 31st and the new rate for those days is $69 per day.
Greg Thompson:
And Colton, one of the things that I've read recently, is that one of the things that you can do, because of ELDs, is that if you download your ELDs and you've done that throughout the year, then you've got the proof from January 1 through September 30th. Same thing from October 1 through the end of the year. Right?
Colton Lawrence:
That's right. There's a number of ways that they can track those days on the road. ELDs are a great tool. They just need to be aware of their particular ELD and when those devices have the data purged. Some are as quick as six months, some will be as long as five years. So just make sure they are checking that. They can also set themselves up with a per diem calendar where they're just checking each day that they're on the road. Some of our clients will choose to only check the days that they are home. It's also important that they track those half days. So the days that they leave away from home and the days that they come back, and those are calculated differently as well. So for all the details on per diem, they can check out the blog we put together on the per diem changes. But because of those changes, it has taken the number one spot in our tax planning strategies for 2021.
Greg Thompson:
Okay, so we've got number one, let's move to number two on this checklist.
Colton Lawrence:
Well, Greg, the second item on our list is normally number one, but it takes the number two spot this year and it is equipment purchases and repairs. So as we get closer to the end of the year, it is important for our clients to evaluate just how their equipment is running. If they've got thoughts of purchasing a new truck or perhaps purchasing additional equipment, truck or trailer, now is a good time to really look into that. And because of the shortages of equipment out there in the marketplace, it is important for them to get with their dealers now, take a look at what is available, and hopefully be able to make those purchases before December 31st.
Greg Thompson:
Yes. So I want to ask you kind of an off the wall question about that, and you just mentioned that with the shortage that is happening. A lot of folks say, booked this purchase back in March. It may not be happening until the end of the year. Some folks may get lucky, something may open up and they can make that purchase before the end of the year. I don't know necessarily how dealers work, but if there is a deposit that is put down on a truck that's going to be delivered in 2022 at some point, is that something that you can deduct or how would you work with that if that is actually something that takes place?
Colton Lawrence:
Well Greg, it is important for folks to understand that the deductibility of a deposit will not come into play until that truck or trailer goes on the road. So it is more a function of the date the equipment is placed in service and begins being used by the business for purposes of generating revenue than when they actually have that cash outflow. So to answer your question, a deposit only would not benefit them for tax purposes. They need to get the equipment out on the road.
Greg Thompson:
Got you. And most of our experienced owner-operators understand that. This was more of a question for say, an independent contractor who's looking to buy that first truck or get into the business. It's just one of those things as we're getting into the business that we're looking at. We're learning as we go. It's one of those things that I was just really curious about in running my own business and now hearing that makes perfect sense. We talk about it all the time, Colton. It comes down to planning, really trying to work with folks on having a plan, building a plan and then being able to, as we talked about here, if you have an opportunity to buy a truck that comes up in the last three months of the year and you think you can do it, jump on it, do it, but also make sure that you're able to get that paperwork and that payment in so you can take advantage of that deduction.
Colton Lawrence:
That's right. They need to be able to get all that done before January 1st and if they can't, then alternatively what they should look at is perhaps repairs that they've been holding off on. Now would be a good time to get those repairs done. Could be a major repair, could be a smaller repair, but getting your equipment into the repair shop now will allow you to take that tax deduction by expensing and taking advantage of that repair in 2021.
Greg Thompson:
And that is a great point because we all know that trucks do a few things and one of those is that they wear out. They wear down and you need to keep your maintenance and repairs up. As I look at this and I look at the reduction potential of it, you think about it in terms of, you've got medical insurance and medical insurance typically resets at the beginning of a year. If you've got something like a colonoscopy or procedure that you've built up your deductible on and you can get that at a lower cost, you go ahead and try to get that scheduled. When we look at maintenance for a truck. Understanding that the money that you put in for maintenance is a deduction for your business which then helps you on the tax side. That's something to really consider.
Colton Lawrence:
It is definitely something to consider and hopefully bringing their truck or trailer in to get serviced or taken care of is much less painful than a colonoscopy.
Greg Thompson:
Absolutely. And if that's one thing that we remember from this podcast, we'll put that right on the list. Speaking of the list, Colton, what is number three on our year end checklist?
Colton Lawrence:
Well Greg, coming in at number three on our list is retirement account contributions. So something we talk about a lot in our podcasts and in talking with our clients is the need to plan. And most of the time that planning is centered around growing a business, planning for the business, making purchases, all of those different types of things, tax planning. But something that our clients need to do more of, is planning for retirement because inevitably everybody reaches that time in their life when they need to retire, move on to some different things. Hopefully relax, gets nice R and R after a hard life's work. The only way that can happen is if they have planned for and put money aside for retirement.
Greg Thompson:
I don't know that you and I have talked about this before, but retirement is one of those things that can sneak up on us, particularly if you are an owner-operator or an independent contractor out there on the road 300 days a year. We know Colton that this is not an easy life, it's not easy work. It's a rewarding life to be out on the road and know that you're moving the American economy, but at the same time it's not easy out there. At a certain point you may just say, hey, I need to get off the road, you need to be prepared for that. You need to plan and having your Roth, your IRA, whatever your retirement plan is, is real important.
Colton Lawrence:
That's right. They need to have those things set up and we'll talk just a little bit about those different retirement accounts. But the difficulty comes in that there are many, many things that are pulling our money in different directions. You got the business that has its needs and requirements, repairs and maintenance of the truck and all of those different expenses that we talk about on a regular basis. Everything from the business, to our family, to the lifestyle that we want to live. And unfortunately too often retirement takes a backseat to that. And so we recommend that folks are setting money aside, much like we recommend they set money aside for taxes, they need to set money aside for retirement. And once they've set that money aside, there are a host of options of where they can put that money and a host of tax planning strategies that come into play to determine whether they want that money to be taxed now, tax deferred, there's all kinds of situations that come into play that we can talk about.
Greg Thompson:
And given the fact that you've brought it up here on our checklist at the end of the third quarter, beginning of the fourth, looking at the end of the year, this is one that I'm sensing you really want people to take a look at at the end of the year and start having some conversations. Contact your team at Trucker CFO to take a deep look at where they are with that retirement planning.
Colton Lawrence:
That's right. And having a conversation with us, we can definitely let them know what the potential tax savings are based on the type of account they choose to set up or already have set up and the amount of contribution they decide to make. And one other point on these contributions is that many of them will be an option for them for the 2021 tax year all the way up and until April 15th of 2022. So if someone out there listening now does not have the money set aside or won't have enough money set aside by December 31st, they can continue to plan for and potentially save that money up until that April 15th deadline.
Greg Thompson:
So as we talk about a lot, having a plan, this is a situation in which we're talking about something in October and we're looking six or so months down the line in April and saying you know what, if you want to look at this, you don't necessarily have to have everything locked down by December 31st. You got a little more time to work with and you can take advantage of that time.
Colton Lawrence:
They can take advantage of it. And for tax year 2021, an individual 50 years or younger has a maximum contribution to these different IRA accounts of $6000. If they are over 50, they've got a contribution limit of $7000. Again, those are for the IRA and Roth IRA retirement accounts. And for any of these other potential accounts that they may have set up or looking to set up, we recommend they give us a call and we can talk to them about the tax advantages or disadvantages of the different options.
Greg Thompson:
Colton, I think we're ready to move on to number four on our list. What is number four?
Colton Lawrence:
Well Greg, number four is kind of the opposite of what number three was and that is taking money out of your retirement account. Taking a distribution but not just any distribution. This would be what we call a hardship distribution. One of the things that has come about with Covid is the option of taking a distribution from a retirement account if you have one tax free or without the penalties associated. There are definitely some requirements that need to be met and we can talk to you about what those are. But if you are needing some extra money and are potentially looking to avoid the penalties associated with taking those distributions, it's not normally something we would recommend, but given the circumstances of the last couple of years, this is an option for those out there and something that we can talk to our clients about.
Greg Thompson:
Well, as we look at the total landscape of what's going on in terms of running a business in today's climate and we talk about Covid being part of that climate, you have to be able to look at all of your resources and as we talked about in the previous point in the checklist, you want to try to do everything you can to save money for that day that you want to retire. But there are times and this is certainly one of those, as we try to work our way through the pandemic. It's one of those times that you need to look at all of your assets and when you do that and you know that you have that money there and you now, as you talked about, have this option. Let's use an example of if I need to get maintenance on my truck, but I really can't budget for $6000 worth of maintenance. But that would be great to be able to take that hardship distribution, put into that maintenance. And then, then if I'm thinking correctly, and please stop me if I'm not, if you're able to use that money on maintenance, you can then have that as a deduction with your business, right?
Colton Lawrence:
Absolutely. They can use that money however they need to use it. They can put it into their business. They can use it to help grow their business. They can live off of it if they need to. But if they spend that money on something that would normally be considered tax deductible. There's no reason why they can't do the same thing.
Greg Thompson:
Well, that's certainly good to know. And without getting too deep into it, can you give us a little bit of insight on what somebody would need to do if they had to do a hardship withdrawal. Again, understand that everybody's tax situation is unique. Everybody's financial situation is unique. If we don't want to get too deep into it, we don't have to, but if there's something at a high level, you can talk about here that'd be great.
Colton Lawrence:
At a high level, basically, an individual only needs to demonstrate that they were negatively impacted by the effects of the Covid 19 pandemic. That can be something as simple as showing that they themselves were diagnosed with Covid. It could be something showing that their business was negatively impacted and there was a downturn because of the pandemic. It is pretty lenient, but at the same time it's not something that just anybody can do. We would want to talk to each individual about their specific situations and make sure that they're not doing anything that would be against the tax code and open themselves up to potential penalties in the future.
Greg Thompson:
And Colton. The other thing that comes to mind is that when you're talking to folks about this, you're looking at their entire financial situation. You guys are walking through and saying you could do this, it will have this impact that will be positive. The negative impact is that you're going to be withdrawing money from your retirement account, that you're not gonna have that money in that place anymore. And knowing you and knowing your team, I think that you guys take a global look at somebody's business and financial situation as you guys are walking through all the scenarios with them. Is that correct?
Colton Lawrence:
That's correct. When we are speaking with the client, we're going to take a global approach like you mentioned. Take a look at every opportunity and option out there for them to save money, to tax plan, and set themselves up not only for the now but also for the future when it comes to what their tax situation looks like.
Greg Thompson:
So Colton, I wanted to ask you what is number five on your list?
Colton Lawrence:
For those individuals that have listened to our podcast series, number five is not going to be a shock. It is going to be something that they have heard me preach and talk about on a regular basis and that is to pay their quarterly estimated taxes. The difference being that we are past the third quarter and the only one left is the January 15th deadline. However, as we get close to that December 31st date, it is important for folks to evaluate how much money they've made, take a look at what their potential liability is going to be for all of 2021 and make additional contributions or perhaps an initial contribution towards that tax liability and prepare for the tax liability coming up in March or April rather than getting stuck with the entire bill when we prepare the taxes later on.
Greg Thompson:
Colton, I'm so glad you brought that up because that is a great point. And I'm going to use my experience as a business owner to illustrate that. Five years ago I established my LLC in 2016. And I had spent part of 2016 as a W-2 employee at a place where I worked. That job ended and I started my own company and been very grateful to have that company over the last five years. That first year, I learned something that folks out there, I don't want you to learn this the hard way, but here's what happened. I was working with a good accounting service at the time, getting good advice. But what had happened was that in 2016 when I started the business, I paid one quarterly tax and they estimated what my 2017 was going to be based on my 2016 earnings. But my 2016 earnings were only for half a year. I was a W-2 employee for the other half. It was miss estimated. I didn't do what you just said, looked at everything that I had earned. Everything that I was projected to earn. I was paying quarterly's but they weren't based on good estimates because I was growing my business. When I went to pay my 2017 tax bill in April of 2018, I got the surprise of a lifetime because I had one big tax bill to pay. And my accountant at the time said whatever you do, make sure you pay that on the tax deadline and I was able to pay it. But what you're talking about here, particularly if you've not been paying into it at the appropriate level during the year, you got one opportunity in January to do a catch up because here's the thing that's gonna happen. You're gonna have a tax bill that you have to pay for your 2021 total tax bill and you're gonna have to pay an estimate. You're gonna get a double hit on the 15th April 2022. Did everything I say there make sense?
Colton Lawrence:
Yeah, it all made sense. And you're exactly right. Unfortunately, too many people, they're always playing catch up when it comes to their quarterly estimates and their annual tax liability. So what we do here at Trucker CFO is we recommend individuals, give us a call, we can do an evaluation of where they are at this point in the year. We can look at how much money they've made to this point in the year. And we can evaluate what if any of these top five options that we put on the board for tax planning as well as others that aren't a part of this podcast, how that might benefit them and how they might take advantage of those in preparing. So rather than just taking the list and saying, oh I'm gonna do this one or that one. The approach that we take is to look at it holistically, look at how much money they've made and see how much benefit they can get from employing all of them.
Greg Thompson:
Colton, what you just brought up is so key. Because every one of these five points on the checklist are items that you and your team can walk through with people. Have discussions, look at where they are, what they need to do in terms of planning, where the potential savings might be, where the expenses can be plotted out. And I wanted to ask you one other question about quarterly taxes. As we look at quarterly taxes, we look at January 15th being an opportunity to potentially put more into that quarterly tax if we need to. In this situation with quarterly taxes, are you guys looking at all of the earnings for 2021? Because they'll know prior to January 15th, what they've earned for the year. They should know that, should have a good idea. And you're looking back at what they've paid in quarterly taxes. Is that how you base that recommendation?
Colton Lawrence:
That's exactly how we look at it Greg. We take a look, as you said, the entire year. We're basing it off of their income and expenses for the entire year to date. So in the case of quarter four, it is for the complete year. Then we take a look at what payments they may have already made and we subtract that. So in the case where somebody in say, quarter three has an estimated tax liability based on their income and expenses through quarter three, let's imagine their tax liability is $10,000 to that point in the year. And let's say they've made estimated payments of $7500. In that case we subtract the $7500 from the $10,000 and they are left with $2500 that is due for quarter three estimated taxes. Same approach applies for quarter four and for all of the other quarters.
Greg Thompson:
And to illustrate your point just a little bit further, let's go back again and say that our total tax liability for tax year 2021 is $10,000. But through quarter three we've only paid $5,000 because we've done really well in the back half of the year and we haven't necessarily accounted for that in our estimates going forward. So you'll be able to know that going into January 15th, that last payment, that somebody's only paid $5,000 on a $10,000 tax liability. They may want to pay more than $2500. If they can get to $4000, if they can get to $5000, that would be good. But whatever they can do above the $2500 would be even better.
Colton Lawrence:
Any amount that they can pay towards that complete estimate is always going to be beneficial and it prevents them from ending up in that situation where they owe all or a large portion of their tax liability come April 15th.
Greg Thompson:
And you stuck the landing on that one because if you've got a large tax liability and as we talked about in my example, I did have a large tax liability that was owed on April 15th and I also had to pay my estimated taxes for the first quarter of that year. So it was a double hit at that point and you just don't want to get yourself into that situation, as you said playing catch up because a lot of these things, it takes a couple of years to catch up. It's just no fun.
Colton Lawrence:
And that's where we see many owner-operators and independent contractors fail in their business is when they're playing catch up with taxes.
Greg Thompson:
And that's exactly why we've spent the time to go through this checklist. And is there anything else that you want to share with folks as we head into the final quarter of 2021? Again, I can't believe we're already here.
Colton Lawrence:
Well Greg, just to summarize, everybody out there listening, give us a call, we can do that evaluation with you before the end of the year. We can evaluate how much money you've made year to date. We can take a look at these different options as far as reducing your tax liability before we get to the end of the year. It's too late if they try to do this after January 1st for most of these items.
Announcer:
That’s Colton Lawrence, The Trucker CFO with his closing thoughts on this edition of The Trucker CFO Podcast. Once again, we would like to thank Colton for his time and perspective. As we mentioned at the beginning of the podcast, Trucker CFO and PodWheels would like to remind our listeners to please keep in mind that every tax and business situation is unique. In addition, the perspective shared on this podcast should not be considered this tax advice. If you have questions regarding your specific tax situation, you should consult a qualified tax professional.
Before we close out the podcast, we'd like to talk to you about Trucker CFO. Do you have a team of tax, accounting, and business advisory professionals who understand the complexities of the trucking industry? There are a number of ways you can contact the team at Trucker CFO.
Visit the company's website at TruckerCFO.com. On the homepage, you can fill out the contact us form which will send an email to a Trucker CFO representative. Also through the Trucker CFO website, you can connect to the company through the find a time to talk button to set up an appointment or you can use the chat feature.
If you would rather email Trucker CFO directly, you can reach out to the company through the following address info@truckercfo.com. That's info@truckercfo.com. You can also call Trucker CFO toll free at 1-800-533-4230 and hit option two for sales. That toll free number once again is 1-800-533-4230 and choose option two.
Thanks again for joining us on The Trucker CFO Podcast. As always, Colton Lawrence and the entire Trucker CFO team wish you the best for continued safe travels and good health as you work to keep the American economy on the move.