December is the time of year when we all start thinking about our new year’s resolutions – many of which, let’s admit, we’ll fail to keep. But one resolution every trucking executive should make and keep is to do a good job of tax planning.
Tax planning is even more important than it has been in the past because of the government’s current fiscal situation. If you’ve been following the news lately, you know that the federal government is broke and looking for money wherever it can find it. If that money has to come from a hard-working, job-creating trucking company, well, so be it. Bell & Company has been in business 30 years. We’re seeing more audits now than we can remember seeing in a long time, and those audits are hitting carriers of all sizes.
How can you ensure that six months from now, you’re not sitting across a table from an IRS agent who wants to use your company’s profits to reduce the federal budget deficit? These seven tips will help. Pay special attention to the first two, because if you get them right, the rest will take care of themselves.
First, discuss your tax situation with a qualified accounting firm at least quarterly. You should plan and strategize, not react and hope. Waiting until April to dump your records on your accountant makes it more likely you’ll face something unexpected, and when it comes to tax planning, surprises are bad. In fact, even a “good” surprise – a refund – is bad because that means a carrier has been paying too many taxes throughout the year instead of using that money to build its business. By providing information to your accountant throughout the year, he or she more likely will catch variances, spot developing problems, and keep you from paying too much or too little. Plus, you’ll have more peace of mind. As Jimmy Starr, owner of the Camden-based carrier Woodfield, Inc., put it, “If we see something turn either direction, then we can adjust to it throughout the year instead of having any kind of surprises that would be devastating for our cash flow.”
Also, don’t wait until December to start asking your accountant about last-minute purchases. A good tax benefit won’t outweigh a bad business decision. You don’t want to haphazardly buy assets in December like a last-minute Christmas shopper filling her cart with whatever is left on the shelf. Besides, the trucking industry doesn’t lend itself to that kind of purchase. The most important assets, trucks and trailers, need to be spec’d and ordered months in advance of the end of the year in order to take advantage of the full tax benefits.
Second, make sure your financial statements are complete and accurate. Even the best accountants may not catch something if you don’t provide them the right information, and that could lead to problems. Plus, sloppy record-keeping adds to the expense of preparing the return. The more times an accountant has to stop working, call to ask a question, work on someone else’s return while he waits for the carrier to call back, decide if the answer made sense – the more he’ll have to charge for the time. Meanwhile, he’ll have already produced a cheaper, mistake-free return for the client’s more organized competitor. Which carrier do you want to be?
As part of your records, make sure your fixed asset additions are detailed for your CPA to add to your depreciation schedule. It may not be obvious that you’ve added trucks or trailers, done major repairs, or completed a big renovation to your office. Year over year, the expense may look the same, but there may be some capitalizable items within that profit and loss statement that need to be added to the balance sheet and to the depreciation schedule. Remember, accountants don’t like surprises.
Third, ask your CPA if leasing or purchasing is right for you. Leasing means the payment will be lower, and you can deduct expenses over time. Purchasing enables you to deduct 50 percent of the expense during the first year.
Fourth, periodically revisit your accounting method – cash or accrual. In the accrual method, you pay taxes on receivables even if you haven’t collected payment. Using the cash method, you pay taxes only on your actual revenues. Obviously, the cash method makes more sense for most trucking companies because not every shipper pays in a timely manner and some don’t pay at all. However, certain types of IRS Schedule C corporation companies are required to use the accrual method.
Which brings us to the fifth tip: If you still are a C corporation, you should ask your accountant about converting to an S corporation. S corporations are pass-through entities that are not subject to income taxes, though shareholders’ incomes are. However, there are some additional reporting requirements. The S corporation is best for most carriers, but it may not be right for you.
Sixth, ask your accountant about the government’s changing tax laws. Even if you like to defer paying taxes, you may want to distribute your earnings as a dividend this year rather than wait until the beginning of next year because capital gains taxes may increase in 2013. If that happens, you might be better off paying fewer taxes now rather than more taxes later. Also, ask your accountant if you should take the 50 percent bonus depreciation on new purchases next year or if you should elect out and take the depreciation over time. If taxes increase – as they eventually will – you may want to spread the depreciation out to reduce your tax burden over several years’ time.
Last but not least, make sure your company is paying taxes in all the states where taxes are owed. Many companies are unaware they have multi-state tax issues. They may think that paying their International Fuel Tax Agreement taxes takes care of those state-by-state demands, but IFTA is not an income tax. Also, different states have different rules. For example, if you haul from Arkansas into Texas, that state doesn’t expect you to pay anything. If you simply drive through Arkansas, you owe that state money according to the number of miles traveled through its borders. One particular carrier had no idea it owed money until a tax auditor happened to see one of its trucks arriving at a shipper’s location, wrote the carrier’s name down from the side of the truck, and researched the company’s tax history. That turned out to be a costly delivery – seven years of taxes owed in multiple states.
When it comes to tax planning, there is not always a right or wrong answer because each carrier has different needs and philosophies. Some carriers like to defer taxes as much as possible so they can use the money to build their business. Some prefer to pay their taxes as they go so they don’t have a big future expense coming due at a bad time.
But no one likes an unexpected tax bill, and no one likes an audit. Following these seven tips will help keep either of those from happening so that 2013 is a happy new year for you and your business.