Advantageous tax strategies are an important aspect of the modern business environment. In the trucking industry, many factors can influence tax liabilities each year. The question of allowing certain big-ticket infrastructure expenses – trucking improvements, replacements, rebuilds, and extensive repairs – to depreciate or not creates its own set of challenges. Just as trucking insurance protects business assets from liability exposures, understanding annual tax implications can control overhead costs. Here is how to take advantage of deductions and depreciations for the 2020 tax year.
Vehicle Maintenance and Replacements: Decisions for Tax Purposes
With the 2020 tax filing season quickly approaching, trucking fleet owners are already preparing their documents and options with their accounting staff. Most owner-operators understand that large expenses – tractor and trailer purchases – depreciates. What is less understood is that a range of other large expenses like repairs or tractor/trailer rebuilds may also be depreciated on the same schedule as vehicle purchases. Similar to the way trucking insurance helps to manage risks, taking advantage of depreciation can spread out tax liabilities over several years.
Typically, trucks are depreciated on a three-year schedule, and trailers depreciate on a five-year schedule. For big-ticket repairs, these assets are depreciated on a corresponding base property schedule; three years for extensive repairs or rebuilds of trucks and five years for trailers or flatbeds. A provision in the United States tax code known as de minimis safe harbor allows business owners to expense such infrastructure improvements up to a $2500 cap, allowing for such expenses as engine or transmission rebuilds, component replacements, and other large-scale improvements to non-wear items. This provision can provide its own set of benefits, but owners have available a potentially better option – the benefit of depreciation, which can help to maximize tax deductions over time.
The Benefits of Depreciation
Big-ticket expenses such as vehicle purchases and extensive repairs or rebuilds allow for nearly full deduction of those purchases via IRS Section 179. The only limitation for this option was that truck owners could not deduct losses; in other words, once income reached a zero level, the Section 179 deduction stops.
Over the next few years, however, bonus depreciation is available. Granted by the Tax Cuts & Jobs Act, this bonus allows owners to show a loss through the 2022 tax year. How it works is this: owners deduct the full purchase amount in the first year, then depreciate for the following years according to the three- or five-year depreciation schedules. This tactic can help to stabilize tax liabilities over time. Although the temptation to use this option to eliminate all tax exposures is great, tax advisers typically recommend owner-operators stay within the 10% income bracket.
All taxpayers gained certain tax advantages with the Tax Cuts & Jobs Act; the standard deduction doubled. Bonus depreciation by expensing the full purchase price of repairs or replacements in the first year sometimes leaves this standard deduction available. As an alternative, truck owners can save some of their depreciation for future tax years when the possibility of higher earnings and tax income threatens to push filers into a higher tax bracket. Truckers keep an eye on the expenses associated with trucking insurance, hoping to maintain control over overhead expenses. Depreciation is valuable consideration for the upcoming tax filing season as well as in the coming years. By leveraging the tax code and the deductibles available to filers, truckers can reduce their tax liabilities over longer periods of time.
About Western Truck Insurance Services
Western Truck Insurance Services is a commercial truck insurance agency with roots dating back to 1954. We have evolved into a highly respected, professionally managed, truck and transportation insurance brokerage. The hallmark of our organization is our desire to provide unparalleled service. We go way beyond what you expect to receive from an insurance brokerage. Equipped with state of the art automation, Western Truck Insurance can provide you with lightning fast truck insurance quotes, customer service, Insurance certificates, and coverage changes. Contact us today at (800) 937-8785 to learn more!