As we begin to enter the stretch run toward the mid-April tax filing deadline, we asked Trucker CFO Colton Lawrence to spend some time sharing some of the frequently asked questions that Colton and his team at the Trucker CFO have received during the 2022 tax season. During this podcast, you will hear Colton address questions covering home office deductions, per diem and employing family members within your trucking operation. You’ll also hear Colton address other topics including business owner retirement accounts.
TRANSCRIPT
Announcer:
Coming up next on PodWheels, you'll hear the latest edition of the Trucker CFO Podcast presented by Trucker CFO. Here's a preview featuring Trucker CFO Colton Lawrence...
Colton Lawrence:
When it comes to preparing taxes, a lot of people, they know about the Simple IRA and Roth IRA contributions that are going to be subject to those right around $6500 limits depending on your age. Those are all good things to do
and you can use those in conjunction with some of these other business owner retirement accounts. But not enough folks out there are using these other types of accounts that can be set up when you are a business owner and they include things such as a personal 401k, Keogh, Simple IRAs, Sep IRAs. These are some of those that have different rules based on the fact that you're a business owner. And we recommend that they give us a call, talk to us about what the tax impact would be if they were to set one of those up.
Announcer:
Welcome back to the Trucker CFO Podcast series which is being presented by Trucker CFO. Thanks for connecting with us again here on PodWheels. In this episode of the Trucker CFO Podcast, you'll be hearing directly from Colton Lawrence, The Trucker CFO as he discusses a range of questions that Colton and his team at Trucker CFO have been getting from owner-operators and independent contractors during this tax season. As our regular listeners know, Colton leads the team at Trucker CFO. Colton will be joined on the podcast by Greg Thompson, the Executive Producer of PodWheels. Colton and Greg will be examining topics in this episode of the podcast that include consideration surrounding the home office deduction, employing family members within your operation, and incorporating retirement accounts as part of your overall business plan.
Before we take you to our conversation with Colton, 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 perspectives 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. Later in the podcast, we'll share some information on how you can connect with Trucker CFO to discuss your specific tax, accounting, and business advisory needs.
Now let's hand it off to Colton Lawrence and Greg Thompson. Colton connected with Greg and the PodWheels studio through Zoom audio.
Greg Thompson:
Hello again everybody, Greg Thompson alongside the Trucker CFO Colton Lawrence. Colton, you're actually taking a bit of a breather right now. We're in early March heading into the home stretch of tax season as we approached that mid-April deadline. The first thing I got to ask is, how are you feeling right now?
Colton Lawrence:
Well Greg, we are definitely hopping in the office. We've got a lot of stuff going on. We've got deadlines approaching. As is common this time of year, we've got a lot of people that are on top of it and they're getting their stuff in. We also have those that are procrastinating and it makes for an exciting time. This is what we live for in this business.
Greg Thompson:
Well and I also know during this time of year, you get a lot of questions. Particularly from small business owners, owner-operators, independent contractors, because as you know, everybody is trying to limit their tax liability. How much they're going to pay. There's certain things that you can deduct, there's certain things that you can't. At this time of year, there's so much information floating around. You've got quote unquote truckstop accountants, you've got quote unquote accountants on the internet, you've got a lot of different channels feeding a lot of different information. Some of it good, some of it bad, some of it in-different. So I wanted to take a little bit of time as we head down this home stretch. So just for our listeners, we're going to try to sort through deductions and a few other things here. As I said, we're now heading into that home stretch, the last six weeks of getting your taxes prepared and meeting that mid April deadline. And Colton, let's talk about deductions. Let's talk about if I'm a small business owner out there in trucking, I’m an owner-operator or an independent contractor. I own a small fleet. Let's talk about deductions.
Colton Lawrence:
Yeah Greg, as we talk about some of this stuff, a lot of them are going to be items that most people have heard about, at least conceptually know about these types of deductions. But we're going to take a look at it from the perspective of owner-operators, independent contractors, or fleet owners specifically in transportation. Because there are some things that they need to be aware of as it relates to their businesses and how these different types of tax planning strategies will play a part of their business.
Greg Thompson:
Well, one of the things that we often talk about is when you're an owner-operator or an independent contractor, your home and your office is in your truck. But at the same time when you're home, you may have a space that's dedicated to your office for your business. So let's talk a little bit about home office deductions and let's start there.
Colton Lawrence:
The home office deduction, especially over the last few years, has really taken a step up in terms of knowledge or it being on people's minds just due to Covid and people spending more time at home and different offices going to home work environments. Because of that, we get this question more and more often. As it pertains to the transportation industry, there are a couple things that people need to keep in mind. First of all, when we look at the Home office deduction, we have to understand what the IRS is going to require in terms of the applicability of these rules. And first and foremost, they state that the home office has to be used regularly and be dedicated to that work environment. So if you think about a single truck owner-operator who's out on the road 320 days a year and they are spending most of their time in that truck and they come home fairly irregularly. The question is asked, well how is it that you can be using a home office space regularly and exclusively in the business if most of your business environment is out in the truck. Also, we got a factor in that the owner-operators are probably taken per diem. They probably qualify for that. Because of that, they're getting that $69 per day, now is what the rate is. And the one thing we don't want to do is jeopardize the per diem deduction because that is very significant and it's going to be much larger in terms of its impact than what the home office deduction is. So again, as we look at the single truck operations, we asked the question, are they using it regularly? Are they using it exclusively? And is it going to jeopardize their per diem deduction? And oftentimes for those single truck operations, the answer to that is going to be no. It's just not worth the risk. The cost benefit of taking that deduction isn't worth it in the grand scheme of the overall tax preparation.
Greg Thompson:
You bring up several great points. I want to drill down on this for a moment and realizing that everybody's tax situation is different. You talked about somebody that's out there 320 days. And 45 other days, they're at home. And it's possible that every one of those 45 days, that person who's out 320 days, has gone into their home office. So how would you work with somebody on that? In terms of as you were talking about balancing out the benefits versus the risks.
Colton Lawrence:
Well what we're going to look at is what type of operation do they have. Are they leased on with a motor carrier and their freight is being provided to them by that motor carrier or do they have a dispatcher? Oftentimes we see situations where somebody is married and the spouse is in fact at home dispatching the truck and working on different aspects of the business. And in that case, it would be a very legitimate reason to use that home office deduction. So we kind of look at and ask those questions on what is exactly going on in the business that would justify the regular and exclusive use of that area of the home to qualify for that home office deduction.
Greg Thompson:
And as I'm listening to this, and you brought up the example of the spouse potentially being the dispatcher, you might have your business entity set up to where your spouse is part of your business, is part of an S-Corp let's say. In that scenario, that's something that you're going to definitely look at, correct?
Colton Lawrence:
Right. There are different situations. So right now we've talked about a single truck operation operating perhaps as a Sole Proprietorship or a Single Member LLC or maybe a spouse involved. That is a very different operation than when you have an S-Corporation. You've made that S-Corp election. There are many differences to the way the taxes are handled there. We've got different podcasts that go into that. But when it comes to the home office deduction for an S-Corporation, there are a couple different ways you can do it. But the way we recommend to our clients is to set up what's called an accountable plan. It's basically an agreement written between the business entity and the homeowners or the owners of the business, that is reimbursing the owners of the home for the business use of their property. And that can include things such as the home. It can include unreimbursed mileage. There's a number of different things that can go into that and we will help set up that accountable plan for our clients and talk to them about what they need to have in writing to justify this accountable plan. And it's a great way to get a deduction for home office through the S-Corporation.
Greg Thompson:
So Colton, one of the things that comes to mind when we're talking about the S-Corp option here, and if that's what you have, is that from what you just described, it might be possible. And again, every tax situation is different. You've got to talk to folks to see what all is involved, but in this situation with an S-Corp, would it be possible if somebody had an office space or a room that was 10 by 10 ft, that was part of their 2500 square foot house. Would that be something that they could then rent back to the business?
Colton Lawrence:
In a way it is a rent back to the business. Really what it is, is it's an advance on certain expenses from the business use of that home. Without getting too far into the weeds, there is an agreement that is written up between the S-Corporation that looks at specific expenses incurred by the homeowner. And as a result of those expenses, the business is reimbursing the homeowner, which again, is in most cases the owner of the business as well for the use of that space. And so it looks much like rent but is not in fact rent.
Greg Thompson:
And as we mentioned here, we're talking about independent contractors, owner-operators. Now, let's talk a little bit about fleet owners and when we look at the home office deduction, a fleet owner may very well not even get into a truck. That fleet owner, he or she may own five trucks and run it exclusively out of their house. Is that something that you guys run into?
Colton Lawrence:
It is something we run into and we have fleet owners that are in the truck. They may have four or five trucks and they happen to be in one of them and they are putting other contractors or employees in their other trucks. So the same questions that we've just discussed apply to them. And then we also have those fleet owners that are running the business out of their home. They are staying home, not going out on the truck and it's much more cut and dry for them in terms of being able to use that home office deduction.
Greg Thompson:
Now Colton, I want to shift to another topic and that's per diem. And one of the reasons that I'm bringing it up is that folks who are regular listeners to our podcast, have heard the radio replay podcast that we've had of you being on the Tim Ridley Show, the Dave Nemo show, and Dave Nemo Weekends. Part of RadioNemo, you're on there each week here at the beginning of the year. And you've talked a bit about per diem. So I wanted to give you an opportunity to talk about per diem because despite the fact that it's been a couple of years and there's a lot of information out there, there's still been a confusion about it.
Colton Lawrence:
There's definitely a lot of confusion still out there. And the best way I can explain it is when it comes to per diem. It's important for those in the transportation industry to identify which bucket they fall into. And there's really three buckets. There are company drivers, there are non S-Corporation business entities and Sole Proprietorships, and then there are S-Corporations. Those three buckets each have different ways of handling or treating the per diem deduction. As it pertains to company drivers. More and more, we are seeing the motor carriers offer a per diem type plan for them, but it's important to note that that per diem deduction is not available on their personal tax returns beginning back in 2017. For the non S-Corporation business entities, they can take that per diem deduction as a part of their tax return. And it's important to understand the nuances and different things that have changed with the per diem. We've got a podcast that talks about that, and I would refer people to that if they want to get more into that. And then there is the S-Corporation. And for S-Corporations, they cannot take the per diem deduction as a part of their tax return, but because they are required to set themselves up as an employee of their business, they can take and set up a per diem plan, much like you would have at a motor carrier, and reimburse themselves through payroll.
Greg Thompson:
Now Colton, I want to take a moment and go back to something you mentioned about per diem and company drivers. And I realize that most of our listeners are independent contractors, owner-operators, and fleet owners, but we do have some company drivers who listen to the podcast and want to take a moment and talk about that. You talked about the fact that there are some quote unquote per diem plans out there with carriers. Can you talk about how that works just so folks understand it?
Colton Lawrence:
Sure Greg, I'd love to do that. Using some simple numbers, if a company driver was making $80,000 a year, what a motor carrier might do is allocate a portion of that $80,000 to per diem. And what that's going to do is lower the taxable amount for the company driver. So it may be that they're only going to be taxed on $60,000 and the other $20,000 is going to be allocated to per diem. The important considerations there are, that in reducing their taxable income, they are also reducing the amount of their Social Security contributions. And they are also reducing the amount of income that they can use to qualify for, say a mortgage. So there are those things that they need to consider and understand when choosing those per diem options that are available to them.
Greg Thompson:
Colton, that's a great point as with anything, there are benefits over here on the right and there are costs over here on the left. Now a little bit earlier in the conversation, we were talking about home office, we are talking about the possibility of having your spouse work within the entity structure that you've got. So I want to talk a moment about hiring your spouse or your children to work within your business entity.
Colton Lawrence:
This is definitely something we're getting more questions on. It doesn't happen a whole lot, but it can be an area that folks could look at as a way to reduce some of their taxable income. But it's one that I would caution highly on in terms of the applicability. As we talk first about a spouse working for the business, there are some things that you can do there where you can allocate some of the income from say, a Sole Proprietorship or a single member LLC to the spouse. And you can then use that income for the spouse to do what are called fringe benefits. In essence, a fringe benefit would be like health insurance. You could get the benefit of allocating that amount of money to the spouse and paying for health insurance in a way that is going to reduce the amount of your income that is subject to self employment tax. However, if you are an S-Corporation, keep in mind that you are already required to be an employee of your own business. So it wouldn't make a lot of sense if you're doing things correctly to bring your spouse on as an additional employee simply for those fringe benefits because you could already be doing the same for yourself.
Greg Thompson:
Well Colton, as I'm listening to what you're sharing, it sounds like these situations could be a little complicated, a little intricate. As we talk about so many times in this podcast and many others, every situation is different. What about kids?
Colton Lawrence:
Well as it pertains to kids, there are definitely some options there and being able to allocate some of the income from the business as a tax deduction to kids in a way that is not taxable to them. What I would suggest there is one, definitely give us a call and talk to us. Same with the concept of setting up your spouse. None of these things, although they are suggested and often mentioned as opportunities that you may read about or hear about on the radio, you want to give a professional a call. Don't do these things on your own without talking to a professional because there are so many intricacies that are involved in them. That being said, as it pertains to the children, the recommendations I would make here is that they need to do something that is age appropriate and related to the business activity. So you would not be able to take a deduction or allocate some expense to a child to say come on board and help you drive the truck. Obviously they don't have a CDL, that's kind of an extreme example. But then again, you may be able to justify allocating some expense to the child for say, cleaning the truck when you come home after being out on the road. Maybe you got a power washer and you're going to put them to work doing that. But you probably wouldn't have a three year old doing that. So there's all these little things to look at and really just kind of comes down to common sense. What could a child of a given age do that is reasonable and appropriate for the business activity?
Greg Thompson:
Now Colton, as I'm listening to this, I'm thinking about what is reasonable. And as you said, if I've got A 13 year old son and I say hey, go clean the truck, and I'm going to pay him 50 bucks to do it, that's reasonable. But if I've got a five year old and I'm saying that, that's not reasonable. The thing about it is the fact that these have to be legitimate deductions. They're not something that you're just pulling out of the sky, they have to be legitimate. They have to be real because there's always the possibility that you could be audited. And when you have to look at all this stuff, you gotta do it straight up.
Colton Lawrence:
You gotta do it straight up. Again, it all comes down to that appropriateness. One of the bullet points we've got is the concept of saving money by putting your bookkeeping on a spreadsheet rather than hiring a professional. That is something I have heard said over and over. Maybe you decide you want to have your child do that bookkeeping or consolidation of expenses for you on a spreadsheet. Well that may seem like it's saving yourself a little bit of money, but in the long run it's going to cost you money because that child and even yourself are not experts in how the bookkeeping should be done and what expenses are allowable and so on and so forth. So just keep those things in mind as you are considering these types of deductions and also keep in mind the amount. So we've talked about age a lot. But one thing to consider is you wouldn't go and pay anybody else to wash your truck for say $1000. You can't go pay your child $1000 either.
Greg Thompson:
Indeed, you bring up the point about keeping expenses on a spreadsheet by a family member or a non professional. But remember folks, you get what you pay for. And in this case if you do it wrong, you could be paying a lot in penalties. You could be paying a lot in time that you're going to have to deal with the IRS. As you said on the radio many times, that's a sleeping giant that's waking up and they're just looking for stuff like this if you don't do it right. You don't do it legitimately. And you don't do it with a professional, you're taking a huge risk.
Colton Lawrence:
That’s right. My grandpa used to always tell me, do it right the first time. I used to go up to his house and mow his lawn and I learned some good work ethic and strong work skills from him and that was passed down to my dad and from both of them back down to me. I've definitely learned the concept of doing it right the first time. Too often we see owner-operators and independent contractors that try and cut corners all in the name of saving a buck and it ends up costing them a lot more.
Greg Thompson:
Colton as you know, occasionally we break out each of these podcasts to speak to somebody who's starting their business. I want to take a moment right now and talk about startup expenses and what kind of questions are you getting these days as again, we're in that home stretch. What are you hearing about startup expenses this year?
Colton Lawrence:
There are definitely a lot of startup expenses that folks need to consider as they get into this business. As they perhaps transition from being a company driver into an owner-operator. And the reason we need to do that is the handling of those expenses is a little bit different than just your everyday expenses such as fuel or insurance. When it comes to those startup expenses, we look at the amounts. There are some limits on how much we can actually deduct and there are some cases where those amounts will be capitalized. And other cases where they will not. And so we take a look at all of that. But in any case it's important to start your bookkeeping and tracking of those expenses prior to actually getting into business and hauling that first load because there are those expenses that we want to look at. And definitely take advantage of in terms of reducing tax liabilities.
Greg Thompson:
Now, folks, you've heard Colton and I talk a little bit about S-Corp a couple of times during this podcast and we actually have an entire podcast in our catalog dedicated to S-Corp. Highly recommend that you check it out. But Colton, I know you've gotten a couple of questions specifically on S-Corp during this tax season. I wanted you to talk a little bit about ongoing savings and payroll requirements.
Colton Lawrence:
Greg, this is definitely one of those things that we use on a regular basis as a tax planning strategy. As you mentioned, we've got an entire podcast on it. So just to kind of touch on at a high level, it's important for folks to know that the S-Corporation results in ongoing year after year savings. It's not a single year type planning strategy similar to say, maybe a retirement account contribution.
You will get a deduction which we'll talk about here momentarily. You'll get a deduction for that amount of contribution you make in a given year. With an S-Corp, you're going to get those continuing ongoing year after year savings and in many cases, if you go out five or ten years, those savings are going to total $20,000, $30,000, $40,000 or more. And there's a lot that goes into it. But probably the most important thing for people to remember in making that S-Corp election is they have to set themselves up as an employee. It's a requirement. There's no ifs, ands, or buts about it. They've got to do it because if they don't the IRS may very likely come back and restructure that S-Corp election and force them to pay back taxes on the amounts that they would have paid for self employment tax.
Greg Thompson:
Colton you just mentioned it. And folks, he's been talking about this on the RadioNemo appearances, retirement accounts. Talking about savings and it's something that we all need to look at. We need to look at our future. We need to look at our long term future. So this year as questions have come up about retirement accounts, particularly business owner retirement accounts, what can you tell us about that?
Colton Lawrence:
Well this is an area that not a lot of people are familiar with. When it comes to preparing taxes, a lot of people, they know about the Simple IRA and Roth IRA contributions that are going to be subject to those. Right around $6500 limits depending on your age. Those are all good things to do and you can use those in conjunction with some of these other business owner retirement accounts. But not enough folks out there are using these other types of accounts that can be set up when you are a business owner. And they include things such as a personal 401k, Keogh, Simple IRAs, Sep IRAs. These are some of those that have different rules based on the fact that you're a business owner. And we recommend that they give us a call, talk to us about what the tax impact would be if they were to set one of those up. As an example, I have a client who's taxes I prepared just about a week ago and he was dedicated enough to save some money up to put into a personal 401k. And his contributions significantly exceeded the contribution he would have been able to make otherwise to say a Simple IRA or a Roth IRA which is limited again to that $6500. His personal 401k resulted in the contribution limit of up over $40,000 and that made a significant impact to his tax liability. So, be dedicated enough to put that money away. It's all money you're going to get back. Sometimes tax deferred, sometimes pretax, it kind of depends on what's going on there but definitely keep that in mind and use it as a tax planning strategy.
Greg Thompson:
And you brought up the keyword again, planning. And if you're listening to this in March as we head towards April, it may be one of those things where i can't get to it right now, but it's one of those things in terms of planning for your future, that you really need to give Colton and his team a call at Trucker CFO and say, hey, how can I incorporate that into my filing of my 2022 taxes? And folks who have listened to this podcast long enough know that we always talk about having a plan. This is the reason why because what we're trying to do is help you have a plan so you can save money for your future and you can reduce your tax liability.
Colton Lawrence:
Very true Greg. And let's not forget also that on many of these contributions to retirement accounts, they have up until April 15th to make a contribution for 2021.
Greg Thompson:
And Colton, I'm really glad that you brought that up. I know you've mentioned that before and it basically slipped my mind as we're talking about this topic. But if folks are listening to us right now, and maybe they have some extra money set aside. They’re thinking about, hey, I could do this. Well if you talk to the folks at Trucker CFO, they may be able to say, hey if you look at your retirement options, this may have this type of an impact on your situation. Again, you've got until April 15th. It's a good time to talk to you guys. And getting back to the home stretch. What do you want to share with us at this point?
Colton Lawrence:
Well, Greg, it really comes down to getting with the professionals. We at Trucker CFO stand by ready to help them make those decisions that can help them save money. We are the experts when it comes to trucking. We understand these tax laws as it pertains to their business. That's the important part, the application of these types of deductions vary, depending on the type of business they have. We specialize in truckers, we know how it can help them.
Greg Thompson:
And folks, you just heard it right there from the Trucker CFO Colton Lawrence. And Colton, I know that folks can hear you on the radio in addition to the podcast. The times that you've been on the radio, you've been able to answer some calls. You've been able to talk with the host about different things including personal finance. There's a lot of great content on there, the experience of being on RadioNemo and interacting with professional drivers, that had to be a lot of fun for you.
Colton Lawrence:
I really enjoyed it, and I am grateful for that opportunity to bring the experience and the knowledge that we have and that I have as the Trucker CFO to those listeners out there that are looking to improve their business and their personal finances.
Announcer:
That's the Trucker CFO Colton Lawrence closing out this edition of the podcast. As we noted at the top of the podcast, Colton leads the team at Trucker CFO. The Trucker CFO Podcast is produced by PodWheels in collaboration with Trucker CFO.
Once again, as we mentioned at the top of the podcast, please keep in mind that every tax situation is unique, and 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.
Before we close out the podcast, we would 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 connect with the team at Trucker CFO. Visit the company's website at TruckerCFO.com. From 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 the 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 again, 1-800-533-4230 and choose option two.
Thanks again for joining us on The Trucker CFO Podcast. Just as a reminder you can find and subscribe to our podcast through all major podcast platforms. If you do become a subscriber, we'd like to ask you to take a moment and rate the Trucker CFO Podcast.
Beginning in January and throughout 2022, Colton will be making regular appearances and taking calls from professional drivers on the Dave Nemo Radio Show, Nemo Weekends, and the Tim Ridley Show. All of these programs are part of RadioNemo and they can be heard through SiriusXM's Road Dog Trucking Radio. All of the programs from RadioNemo can be heard in the mornings on SiriusXM channel 146 or through the SiriusXM app. To learn more about RadioNemo, visit RadioNemo.com. That's N-E-M-O RadioNemo.com.
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.