This area is often misunderstood and results in having to pay penalties and interest to the IRS. When you sell equipment that has been fully depreciated, you have a taxable gain to report. For example, you purchase a tractor for $60,000 and you have taken all $60,000 in depreciation. You now have an adjusted basis of zero. You then sell the tractor for $20,000; you now have a $20,000 taxable gain. This is true even though you may still owe $25,000 on the equipment. Loans are disregarded for gain/loss purposes. Many truckers and their tax preparers think that in this situation there would be a $40,000 loss since they paid $60,000 for the truck and sold it for $20,000. That is not the case as illustrated by the example we have just given you.
A benefit to trading equipment instead of selling is that the gain on equipment that is traded is not reportable to the IRS (i.e. no taxable gain); however, it does lower the basis on the new equipment. There is also a benefit to selling equipment (i.e. not trading) and reporting the gain. Your tax advisor can explain this to you. Also, if you happen to run into financial trouble and the truck is repossessed, you can still have a gain if the balance of the loan is greater than the truck’s adjusted basis.
One of the best tax strategies to employ is an income tax projection. Having an income tax projection done will let you know what your potential tax liability is well in advance of the end of the year to give you time for tax planning.
As a business owner, you need to know your tax liability. The reason that you need to know is to enable you to plan your next six months to a year.
You may be planning to purchase a new truck, to take some time off, to do a major truck overhaul, to fix up your home, or to add to your retirement savings. It’s a good idea to have your records looked at by your tax preparer throughout the year so that he can spot potential problems or adjust your estimated taxes.
A tax projection based on your operations through August or September will best indicate what your tax position will be come next April 15. Eight or nine months of operations for the current year is enough to properly estimate how you will do for the full twelve months. The estimate of profit can be adjusted, if necessary, for the next 3 or 4 months. The tax preparer can then prepare a tax projection and leave enough time until the end of the year to do proper tax planning.
Estimated income taxes
Many truckers who do not pay their estimated income taxes on a quarterly basis and prefer to wait until the end of the year are often surprised to find out that they have been charged penalties by the IRS. The point here is that the IRS wants to get their money on a timely basis throughout the year, so they have set up a method of paying estimated taxes four times a year. If you do not adhere to this schedule, then you are subject to penalties for underpayment of your taxes. If you are unable to pay the full amount set up by your tax preparer, pay as much as you can instead of not paying at all.
This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at (800) 697-5153. Visit the website at pbstax.com.
Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.
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