In December 2017 the United States Congress passed the largest reform to the Internal Revenue Service (IRS) Tax Code since early 1980s. This legislation began impacting taxpayers in 2018 and will continue through 2025 when certain provisions and set to «sunset» or expire.
Although the legislation was expected to simplify the tax filing process, many of the changes have added significant complexity to the tax code and filing process. Below is a summary of certain key parts of the legislation that will impact many owner-operator truck drivers.
Qualified Business Income Deduction
Under the Tax Cuts and Jobs Act (TCJA), a significant change was made that adds s 20% deduction for taxpayers who have «Qualified Business Income» («QBI») from a sole-proprietorship, partnership, or S-corporation. The term QBI is generally defined as the amount of net income from a qualified trade or business. As an owner-operator, you are entitled to receive the new pass-through entity QBI 20% deduction if you operate your business as a sole – proprietorship, partnership, or S-corporation. For the average single sole proprietor owner-operator, this will save you approximately $2,000 in taxes starting in 2018. There are limitations, thresholds, and exclusion relating to the calculation of the deduction.
Depreciation and section 179 expensing
The TCJA changed these rules and extended the use of bonus depreciation. Through 2022, businesses are now allowed to immediately deduct 100% of the cost of eligible property in the year the property is placed in service. The amount of allowable bonus depreciation will be phased lower over a four year period: 80% in 2023; 60% in 2024; 40% in 2025; and 20% in 2026. Previously, bonus depreciation was only available for new property. This rule has been eliminated and bonus depreciation may be used for both new and used property.
Section 179 permits the immediate expensing of certain depreciable tangible personal property – like tractors and trailers – up to a maximum amount of $500,000. The TCJA expense the definition of Section 179 property and increased the maximum amount a taxpayer may expense to $1,000,000 and increased the phase-out threshold to $2,500,000.
The TCJA significantly increased standard deduction amounts. The increase in the standard deduction will likely benefit those taxpayers who do not itemize today. Generally, many individuals who itemize their deductions under existing tax law will likely not itemize in the future as their itemized deductions will not exceed the standard deduction.
Under the new tax laws, it appears that the per diem deduction is still available to independent contractors who have a trade or business. This is a significant tax advantage to the independent contractor!
Affordable care act penalty
Taxpayers were required to have health insurance that provided certain minimum essential coverage under the Affordable Care Act or they were required to pay a penalty. Under the TCJA, after December 31, 2018, the shared responsibility payment is repealed. It appears the IRS will not consider your 2017 and 2018 income tax returns complete unless you provide information about meeting your minimum essential coverage or paying the penalty. However, after December 31, 2018, it appears the penalty will no longer be assessed.