Depreciating Trucks and/or Trailers
An essential part of any business is the equipment and personnel behind the product or service that’s being offered. Trucking Companies for hire offer their equipment and drivers for a fee in order to transport the brokers/shippers freight from point A to point B. During the transportation process, the Carrier’s expenses are generally salaries, fuel, tolls, insurance, truck/lease payments, maintenance, trailer payments, food, and sometimes lodging if no sleeper is provided in the trailer. Some expenses can be deducted when paid, while other business expenses need to be capitalized and depreciated over the course of the assets useful life. This article will provide an overview on the depreciable assets the Carrier purchases in order maximize those deductions come tax time.
Truck & Trailer
First and foremost, Trucking Companies require a truck to drive and a trailer to haul the Broker’s/Shipper’s freight. The business decision whether to purchase or lease the truck and trailer will impact the Carrier’s taxable income come year-end. Either method, purchasing or leasing, will allow deductions against gross taxable income. However, if purchasing the truck, and depending on how many trucks are in the fleet, the IRS would require the Carrier to capitalize the cost of the asset and depreciate it over the course of its useful life. An alternative method from capitalizing and depreciating the truck, assuming the truck threshold isn’t exceeded, is to take a standard business mileage rate (i.e. for every business mile the truck travels it will be able to deduct 56 cents per mile). If using the standard mileage rate, with the exception of tolls and parking, you can not deduct your actual expenses for that year (i.e. depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, or vehicle registration fees) and no depreciation was allowed to be claimed in earlier years for this vehicle.
Depreciation of a Truck/Trailer
In order to depreciate equipment, the IRS requires the following:
- The equipment must be property that you/business owns
- The equipment must be used in the business or income producing activity
- The equipment must have a determinable useful life
- The equipment must be expected to last more than one year
Once the four bullet points are met, the capitalization and depreciation of the asset begins when the asset is placed into service for use in your trade or business or for the production of income. You stop depreciating the asset when you have fully recovered your cost or other basis or when you retire the asset from service, whichever happens first.
The capitalization of the asset is all based on the basis of the asset being placed into service. Generally the basis of the asset will include the full purchase price of the asset. The IRS provides a 3 & 5 year useful life for the over the road tractors and trailers. Accelerated depreciation methods are available for tractors and trailers, and could be utilized for tax saving purposes.
As the aforementioned bullet point states, the business must own the equipment in order to receive depreciation deductions from the asset. Depending if the lease is a finance lease will solely dictate if ownership is truly present. If it is just a regular lease and the equipment needs to be returned at the of the lease life, then specific calculations need to be done as to the deduction for tax purposes on each lease payment.
Repairs & Maintenance
If the business improves the depreciable property, you must treat the improvement as separate depreciable property. Improvements mean an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. You generally deduct the cost repairing business property in the same way as any other business expense. However, if a repair or replacement increased the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it.
Trading in a Truck/Trailer
If you plan on trading in a truck and/or trailer for similar equipment, make sure proper records are kept relating to the transaction details including the following: new cost of the truck/trailer, amount of loan if taken, the value the selling party is giving you for your old equipment, and any other consideration if given.
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