IRS rules on business income deduction favorable for independent owner-operators

The Tax Cuts and Jobs Act offers more savings to owner-operators ( Photo: Shutterstock )

IRS outlines what type of businesses can take deduction 

Many independent owner-operators will catch a break on their taxes thanks to recent IRS rulemakings that favor small businesses.

The tax reform law, also known as the Tax Cuts and Jobs Act, enacted last December included a provision for certain small business owners to deduct up to 20% of qualified business income from their taxes. 

The 20% deduction, which starts as of the 2018 tax year, applies to those companies set up as sole proprietorships, partnership and pass-through “S” corporation.

Last month, the IRS issued new regulations seeking to clarify who can take the 20% deduction. Mark Flinchum, a partner at accounting firm Katz, Sapper & Miller, says the regulations will favor trucking companies.

The tax reform act was generally favorable to the industry, Flinchum say. But some aspects such as the deduction for qualified business income needed further clarity. 

“When the Tax Cuts and Jobs Act was passed in December, it was done very quickly,” Flinchum said. “There was no guidance on who would qualify for the deduction, so  we’ve all been waiting patiently on those regulations to come out.” 

The majority of U.S. trucking companies could be eligible for the deduction. 

The IRS received just over 623,000 returns from trucking companies structured as sole proprietorships in 2016. Trucking companies set up as S corporations, which allow net income to be distributed directly to owners, filed 89,000 returns in 2013. 
 
Trucking companies structured as traditional “C” corporations filed just over 125,600 returns in 2013, the IRS said. 

The IRS says the deduction is generally available to eligible taxpayers with 2018 taxable incomes below $315,000 for joint returns and $157,500 for other taxpayers. The deduction may be limited for taxpayers above those thresholds. 

Flinchum says companies structured as an S corporation, partnership, or sole proprietorship should likely see a top federal tax rate of 29.6 percent. A C corporation structure, though, would face an all-in federal tax rate of around 39.8 percent. 

The qualified business income deduction will also be allowed for businesses set up independently of each other, but that report taxes through a holding company.   

“Some trucking companies might be set up with separate transportation, leasing, logistics and real estate component,” Flinchum said. “It was a question of whether those would be treated as one business for tax purposes.” 

But Flinchum warns that the deduction could be limited in certain circumstances, particularly based on W-2 wages and the fixed asset investment.

In a blog post on the subject, Flinchum says carriers that  “work heavily with an owner-operator fleet and have little W-2 payroll or lease a significant portion of their equipment, the QBI deduction could be drastically limited or non-existent.”

Overall, though, Flinchum says the new rules point to lower tax bills. Along with the 20% deduction and the 100% bonus depreciation deduction for purchases of new and used equipment, Flinchum says owner-operators should see significantly lower tax bills starting next year. 

“It’s definitely taxpayer friendly,” Flinchum said. “It’s going to be a significant tax savings.”