Transportation Industry and Truckers

Transcription

1 CPE/CE 1 Credit Hour Transportation Industry and Truckers Expenses and Per Diem Rates Interactive Self-Study CPE/CE Course

2 Transportation Industry and Truckers Self-Study CPE/CE Course Overview Program Content: Content includes special per diem rates for meals for transportation workers both within the Continental U.S. (CONUS) and outside the Continental U.S. (OCONUS). Rules for depreciation of trucks and trailers is presented, along with special rules for the cost of certain property commonly purchased by truckers. Information about tax home and travel expenses is also presented. Publication Date: September Expiration Date: The Final Exam must be completed online within one year from your date of purchase or shipment. See the Final Examination Instructions on the next page for information regarding final exam completion. Field of Study: Taxes. Program Level: Overview. This course provides a general overview of the subject area from a broad perspective. It is appropriate for tax professionals at all organization levels. Recommended Participants: This course is recommended for tax professionals who assist clients in dealing with the IRS. Prerequisites: None. Advance Preparation: No advanced preparation is needed to complete this course. Type of Delivery Method: Interactive self-study. CPE/CE Credit Hours: 1 Credit Hour. One 50-minute period equals one CPE/CE Credit Hour. Passing Grade: Participants who answer a minimum of 70% correct on the final exam will receive a Certificate of Completion. See the Final Examination Instructions on the next page for further information regarding passing requirements and acquiring the Certificate of Completion. Record Retention: As an IRS-approved provider of continuing education, Tax Materials, Inc. will report successful completion of this course to the IRS. According to the IRS, at some point in the future, you will be able to view your completed continuing education credits through your online PTIN account. Complaint Resolution Policy: Please contact our customer service department toll-free at Refund Policy: 30-day money-back guarantee. For information about our refund, complaint, and/or program cancellation policies, visit our website at Tax Materials, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: National Registry of CPE Sponsors ID Number In accordance with the standards set forth in Circular 230, section 10.6, CPE/CE credits have been granted based on a 50-minute hour. IRS Program Number is 7VT8K-T S Tax Materials, Inc. has been approved by the California Tax Education Council to offer the Transportation Industry and Truckers Self-Study CPE/CE Course 6193-CE-0047, which provides 1 hour of federal credit and 0 hours of state credit towards the annual continuing education requirement imposed by the State of California. A listing of additional requirements to register as a tax preparer may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA, , toll-free by phone at , or on the internet at CTEC Course ID Number 6193-CE-0047 Copyright 2015 Tax Materials, Inc. All Rights Reserved TheTaxReview Transportation Industry and Truckers i

3 Transportation Industry and Truckers Self-Study CPE/CE Course Completion Instructions Helpful Hint: Attempt to relate your tax preparation experience with the information you are studying. By doing so, you will increase retention and maximize your results. Also, utilize the Notes sections to jot down reminders and information that will be helpful to you in your tax practice. Follow the instructions below: 1) Start each chapter by reading the Learning Objectives. 2) Read the course materials in the chapter. Pay close attention to: a) Key Facts: Information that is particularly pertinent to the Learning Objective. b) Examples: Review the examples to associate the information to real-world application. c) Notes: Many of the main points of the chapter are highlighted. Review the notes and try to relate the content with your experience. 3) Complete the Self-Quiz at the end of the chapter. The questions are broken out by Learning Objective. Review the Learning Objectives before completing each set of questions. Determine your progress by comparing your answers to the correct ones on the pages that follow. 4) After completing the study material, and taking the Self-Quiz, complete the Final Exam located at the back of this instruction booklet. Final Examination Instructions Expiration Date Reminder: The Final Exam must be completed online within one year from your date of purchase or shipment. CPE/CE credits are not available more than one year after your date of purchase or shipment. All Final Exams are administered online at It is recommended that you review the Final Exam at the end of the course before taking it online. Final Exams mailed in will not be graded. Follow the instructions below: 1) Go to 2) Click on Login to Education Center, where you will find a location to log in to the Final Exam. 3) Enter your User Name in the self-study CPE/CE login location. The address associated with your account at Tax Materials, Inc. is your User Name. If you do not have an address, or have not provided one, please call our toll-free number at to be assigned a User Name. 4) Enter your Password. The zip code associated with your account is your password. If you are having difficulty logging onto the Final Exam, please call our toll-free number at ) Select the Transportation Industry and Truckers Exam and click the Take Exam button. 6) You will be taken to the Final Exam. First confirm your First Name and Last Name are correct. This is how your name will appear on your Certificate of Completion should you achieve a score of 70% or higher. Take the Final Exam. Read the questions carefully and answer them to the best of your ability. At the bottom of the exam, click on Submit Answers when finished. You will instantly know if you have passed the test. If you failed, you are able to retake the test. If you passed, the Certificate of Completion will be available for you to print. Complete Evaluation Form Please provide suggestions and feedback regarding this CPE/CE course. The last page contains an Evaluation Form. After completion, please mail to: Tax Materials, Inc Minnetonka Ind. Rd., Ste. 221 Minnetonka, MN Thank you for helping us improve our CPE/CE course offerings! ii TheTaxReview Transportation Industry and Truckers

4 Learning Objectives / Table of Contents Learning Objective A Learning Objective A Identify statutory authority for federal regulation of the trucking industry. B Learning Objective B Recognize the employment status of an individual in the trucking industry. C Learning Objective C Select business expenses allowable for truckers. D Learning Objective D Apply taxpayer elections available under the tangible property regulations. E Learning Objective E Compute heavy vehicle use tax. Final Exam Course Evaluation TheTaxReview Transportation Industry and Truckers iii

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6 Truckers and Transportation Industry CPE/CE Learning Objectives Successful completion of this course will enable the participant to: A Identify statutory authority for federal regulation of the trucking industry. B Recognize the employment status of an individual in the trucking industry. C Select business expenses allowable for truckers. D Apply taxpayer elections available under the tangible property regulations. E Compute the heavy vehicle use tax. Glossary Terms Employment classification factors. Employment classification factors include behavioral control, financial control, and the type of relationship between the parties. Heavy vehicle use tax. The heavy vehicle use tax is imposed on vehicles with a taxable gross weight of at least 55,000 pounds and paid by the person in whose name the vehicle is registered. Hours of service rules. The hours of service rules specify limits for the maximum driving time and on-duty time without a rest period and the minimum rest or off duty periods. Tangible property regulations. The tangible property regulations contain standards for determining whether costs incurred in acquiring, maintaining, or improving tangible real or personal property are to capitalized or deducted. Tax deductible business expenses. The ordinary and necessary expenses incurred to carry on a trade or business. Learning Objective A Identify statutory authority for federal regulation of the trucking industry. In 1967, the Department of Transportation (DOT) was created to oversee a wide range of requirements such as braking standards, driver licensing standards and maximum work hours, and the overall safety fitness of interstate carriers. In 2004, new driver hours of service rules effectively reduced on-duty time for drivers and increased the time a driver must take off between shifts. Federal Trucking Regulations Trucking regulations mainly deal with the following areas: Freight rates. Issuance of operating permits. Authority to establish routes and types of commodities. Provide guidelines on financial and accounting practices. Provide safety and hazardous materials guidelines. Hours of service for drivers. TheTaxReview Transportation Industry and Truckers 1

7 NOTES Federal Agencies The three federal agencies involved in the regulation of trucking companies are U.S. Customs, the Department of Transportation, and the Federal Maritime Commission. U.S. Customs. U.S. Customs is the federal agency which oversees the entry of foreign goods into the U.S. They issue customs house licenses which allows a third party to act as an agent for the importer (consignee) in processing the paperwork and payment of customs duties before the goods are released for their final destination. Department of Transportation (DOT). The Federal Motor Carrier Safety Administration (FMCSA), a department within the DOT, sets and enforces the Motor Carrier Safety Regulations (MCSR). These regulations set safety standards for the design, manufacture, and operation of transportation equipment. The FMCSA regulates the operations of private carriers including the number of hours a driver can work without rest, and the interstate transport of chemicals and other hazardous cargoes. The FMCSA requires a record be kept on the inspection and repair history of vehicles used in commercial carriage. Hours of service rules. Effective beginning January 4, 2004, FMCSA regulations impose three basic limits: The maximum driving time is 11 hours. After 11 hours behind the wheel, the driver must have 10 hours of rest. The maximum on-duty time is 14 hours. After 14 hours on duty (which may or may not include up to 11 hours of driving) the driver cannot operate a commercial vehicle until he or she has had 10 hours of rest. The 14-hour on duty time begins when a driver comes on duty and can only be stopped with a minimum 2-hour break in the sleeper. There is a maximum 60 hours on duty limit in any seven consecutive days. If the company operates seven days per week, the maximum is 70 hours in any eight consecutive days. Drivers may restart the 7/8 day period with 34 hours or more off duty. Effective October 1, 2005, commercial motor vehicle drivers using their sleeper berth provision must take at least eight consecutive hours in the sleeper berth, plus two consecutive hours either in the sleeper berth, off-duty, or any combination of the two. KEY FACT Drivers must keep a detailed log book that records enough information to prove the driver is in compliance with the above requirements. Federal Maritime Commission (FMC). FMC regulates the overseas shipping industry. They are responsible for issuing licenses for non-vessel operating common carriers and regulating the tariffs charged for ocean freight shipments. 2 TheTaxReview Transportation Industry and Truckers

8 Learning Objective A Self-Quiz For answer, see Self-Quiz Answers, page 19. Test your knowledge and comprehension of information presented in Learning Objective A. 1) Roger is employed by a small trucking firm that operates seven days a week. Roger is subject to hours of service rules for on-duty hours within any eight consecutive days and a minimum off- duty period before starting another on-duty period. The maximum number of on-duty hours in any eight consecutive days is: a) 80 hours. b) 77 hours. c) 70 hours. d) 60 hours. NOTES Learning Objective B Recognize the employment status of an individual in the trucking industry. A worker performing services for a business falls under one of the following classifications: An independent contractor. A common-law employee. A statutory employee. A statutory non-employee. KEY FACT If a worker is correctly classified as an employee, the business hiring the worker is subject to employment tax rules. If a worker is correctly classified as an independent contractor, the business can avoid employment tax issues. The question of whether or not a truck driver is an employee or an independent contractor of the one hiring his or her services generally depends on the following factors: Behavioral control. Financial control. Type of relationship between the parties. Behavioral control. If the business hiring the truck driver has the right to control the truck driver s behavior, the truck driver is likely an employee. Employers generally control when and where work is done, what tools or equipment to use, what workers to hire or assist with work, where to purchase supplies and services, what work must be performed by a specified individual, and what order or sequence to follow. In addition, employees may be trained to perform a service in particular manner. The following behavioral control factors could indicate the truck driver is an independent contractor. Although no single factor is determinative, an independent contractor will: TheTaxReview Transportation Industry and Truckers 3

9 NOTES Choose the route and hours of operation and hours at rest even if there are specified pickup and delivery deadlines. Provide his or her own truck to make the delivery. Hire any assistant drivers needed for the delivery. Pay for fuel and any required maintenance for the vehicle. Obtain his or her own training needed to become licensed as a commercial truck driver. Financial control. If the business hiring the truck driver has the right to control the business aspects of the truck driver s job, the truck driver is likely an employee. Employees generally are guaranteed a regular wage and work for an hourly fee or salary. Although no one factor is determinative, a truck driver classified as an independent contractor is more likely to: Incur expenses that are not reimbursed, such as fixed overhead costs that are incurred regardless of whether work is currently being performed and operating costs such as fuel, maintenance and repair. Have significant investment in facilities used to perform services for someone else, such as maintaining a separate business location. Be free to offer their services to other businesses or consumers. Be paid a flat fee for a specific job rather than by the hour. Make or lose money on each shipment, depending on the fee charged and the amount of unreimbursed expenses incurred. Own or lease the truck. If the driver makes truck payments to the business hiring his or her services, the payments are not contingent on how much or how little the driver works. EXAMPLE Fred drives for Mathews shipping company. Mathews owns the truck and leases it to Fred by deducting 40% of the gross fee earned by Fred for each shipment, up to a set dollar amount for each month. Fred must pay the set dollar amount for the lease each month for the length of the lease, regardless of how much or how little he works. Fred is not under the financial control of Mathews even though he leases his truck from them. Type of relationship between the parties. Employer-employee relationships generally continue indefinitely. Employers often provide fringe benefits to employees such as health insurance, pensions, and vacation pay. A worker who is key to the success of the business is more likely to be controlled by the business and be considered an employee. An independent contractor will likely receive: Some type of written agreement like a contract or invoice for each shipment or group of shipments. No benefits from the shipper other than a flat fee for hauling freight. 4 TheTaxReview Transportation Industry and Truckers

10 Drivers Who Are Statutory Employees There is one class of drivers that are automatically treated as employees even if they otherwise meet the definition of an independent contractor under the common-law employee status rules. An individual who performs services as an agent-driver or commission-driver engaged in distributing meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or laundry or dry-cleaning services for his principal is a statutory employee if the contract of service contemplates that substantially all of such services are to be performed personally by such individual. The individual is not a statutory employee if he or she has a substantial investment in facilities used in connection with the performance of the services (other than in facilities for transportation), or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed. EXAMPLE Dick delivers bakery products for a local bakery to area supermarkets. He provides and maintains his own delivery truck and is not reimbursed for the cost of fuel. He is paid a flat fee for each load and has flexible hours and delivery routes provided each store receives their delivery by a specified time. The agreement between Dick and the bakery is that Dick must personally deliver the product to each supermarket. Dick is a statutory employee even though he otherwise meets a number of criteria to be treated as an independent contractor. NOTES KEY FACT There are special rules related to income and expenses for a statutory employee. If the driver is a statutory employee, he or she must receive a Form W-2, Wage and Tax Statement, with box 13 Statutory employee checked. The amount from box 1 of the Form W-2 is reported on line 1 of Schedule C (Form 1040), Profit or Loss from Business. Enter related statutory expenses on the appropriate lines of Schedule C. Statutory business expenses are not subject to the 2% AGI limitation like other unreimbursed employee business expenses. Do not combine statutory employee net income with other self-employment income. Instead, file a separate Schedule C for each type of income. Do not carry net statutory income to Schedule SE, Self Employment Tax. The employer should withhold and report Social Security and Medicare tax on the Form W-2. TheTaxReview Transportation Industry and Truckers 5

11 NOTES Learning Objective B Self-Quiz For answer, see Self-Quiz Answers, page 19. Test your knowledge and comprehension of information presented in Learning Objective B. 2) Sue owns her own truck and provides services for the pickup and delivery of laundry for a cleaning company. Sue is considered to be a statutory employee. Sue receives other income for providing delivery services to several other small businesses, has control over her hours of operation, and pays the fuel and maintenance costs for her truck. In this case, income or expenses will be reported as follows: a) Net statutory income will be reported on Schedule SE. b) Statutory business expenses will be subject to the 2% AGI limitation. c) Sue will file one Schedule C for all self-employment income. d) Sue s employer should withhold and report Social Security and Medicare tax on Form W-2. Learning Objective C Select business expenses allowable for truckers. Ordinary and necessary expenses incurred to carry on a trade or business are deductible. Common Tax Deductible Business Expenses The following are common expenses that a trucker or trucking business might incur. Association dues. Member dues for a trucker such as the Owner-Operator Independent Drivers Association (OOIDA), and the Teamsters are deductible as association dues. Bank fees. The fees for a business bank account and check reorder fees are deductible. ATM fees are deductible when the driver needs cash for incidental expenses while traveling away from home. KEY FACT It is an established practice that business bank accounts should be kept separate from personal business accounts to justify deducting the fees associated with their use. Cell phones and internet data plans. A GPS navigational system and some type of communication system to contact customers are necessary for truckers on the road. Therefore, the business use of a cell phone and the internet data plan associated with the cell phone is deductible. A log book of cell phone use may be required to justify the business percentage if the cell phone is also used for personal calls. 6 TheTaxReview Transportation Industry and Truckers

12 Certifications. Classes and certifications required to maintain licenses are deductible. If a transportation worker identification certificate is needed to enter a port area, the cost is deductible. Computers, software, internet access, etc. A trucking business may need a computer and software for various administrative reasons, such as for billing and bookkeeping, as well as internet access fees to enable a driver to bid on potential jobs while traveling away from home. Credit card fees and interest. If a trucking business has its own credit cards to purchase things like fuel, then credit card fees and finance charges are deductible as business expenses, provided the interest tracing rules are met. Depreciation. The cost of the truck and major improvements must be depreciated over the class life of the truck. Tractor units for over the road have a 3-year MACRS recovery period. Autos and trucks in general have a 5-year MACRS recovery period. Also see Learning Objective D, page 11, for other rules. Education. The costs of any continuing education required to maintain a commercial license with an employer, state, or federal agency is deductible. Excise taxes. Special taxes associated with the trucking industry, such as the Heavy Vehicle Excise Tax, are deductible as a business expenses. Also, see Learning Objective E, page 17. Fees. State and federal regulatory fees, such as DMV licensing fees and U.S Customs duties for bringing freight into the country are deductible. Fuel and other truck operating costs. The cost of fuel and other operating costs are deductible when a taxpayer uses the actual expense method for figuring vehicle expenses. A courier who drives a commercial van may decide to use the standard mileage rate instead of actual expenses for the business use of the van. A truck hauling freight is likely to cost more to operate than what the IRS standard mileage rate allows. Therefore, truck drivers generally will use the actual expense method to figure the cost of operating their trucks. Insurance. Deductible insurance premiums can include vehicle insurance if the actual expense method is used, workers compensation for employees, and commercial liability type insurance for damaging the freight that is being hauled. Interest expense. When a business loan can be traced to a business purchase, the interest on the loan is deductible. This rule also applies to the interest on a credit card, and mortgage interest on a commercial building or a qualified home office. Labor. The cost of employee wages, payroll taxes, etc., and the cost of contract drivers as independent contractors is deductible. See Learning Objective B, page 3, for more details. Lease. The cost of leasing a truck is deductible if the actual expense method is used. Licensing fees. The costs associated with obtaining and maintaining a commercial driver s license is deductible. NOTES TheTaxReview Transportation Industry and Truckers 7

13 NOTES Maintenance and repairs. Truck maintenance and repair costs are deductible. However, see Learning Objective D, page 11, for special capitalization rules that may apply. Medical exams. A business expense for medical exams is allowed when the exam is required for a commercial driver to drive a truck. This can include a DOT physical, drug tests, or a sleep apnea study. As a business expense, they are not subject to the 10% of AGI limitation that applies to medical expenses in general. Real estate taxes. If the trucking business has a commercial building or qualified home office, real estate taxes on such property are deductible. Safety gear. Deductible safety gear can include steel-toe boots, work gloves, and cargo straps. Satellite radio. The access fee for satellite radio could be deductible as a necessary expense to help keep a truck driver awake and alert for long distance driving. The cost of satellite radio can also be justified as a business deduction as it can be used as a tool for weather and traffic information. Supplies. Other expenses that may be deductible as supplies may include flashlights, binders, calculators, maps, overalls or other specialized clothing not suitable for everyday wear, luggage, log book papers, coolers or ice chests for food, gloves, sunglasses, etc. Subscriptions. Deductible subscriptions can include load board subscriber fees and trucking industry magazines. Tolls and parking. The cost of tolls and parking while on business is deductible, even if the taxpayer chooses to use the standard mileage method for deducting vehicle expenses. Tools. It is common for truck drivers to carry their own tools for repairs while on the road and away from access to a service station. Tools with a life of 12 months or less are currently deductible. Longer life tools may be deductible or subject to depreciation. See Learning Objective D, page 11, for low cost items that are deductible even if they have a life of more than 12 months. Travel expenses. The cost of food, lodging, laundry, personal care items, the use of showering facilities, and other travel related expenses while on the road are deductible if the taxpayer has a tax home, such as a permanent location or home base of operation where the truck driver traditionally returns to while not on the road. See Special rules for transportation workers, page 10, for more details. Uniforms. Work clothes such as uniforms are deductible if they are not appropriate clothes for general use, such as when the uniform has a business logo or name insignia. Laundry and cleaning costs for the uniform is deductible if the cost of the uniform is deductible. 8 TheTaxReview Transportation Industry and Truckers

14 KEY FACT Trucking expenses that are not deductible include: Expenses that were reimbursed under an accountable plan. Clothing and uniforms that are adaptable to everyday wear. Commuting costs. First phone line into a residence. Interest on a personal loan. Travel with the primary purpose of a personal vacation. No deduction is allowed for any fine or similar penalty paid to a government for the violation of any law. This can include speeding tickets, fines for having a load that is over the weight limit, faulty equipment tickets such as a broken tail light, fines for not having a proper permit to carry a load, and penalties for not updating a required log book, etc. The cost of education to qualify for a new type of work is non-deductible. This would include education to first acquire a license to drive a commercial truck, pilot s license, etc. Once the taxpayer qualifies for the job, education to maintain that license is deductible. NOTES Meals The cost of meals is deductible if: It is necessary for the taxpayer to stop for substantial sleep or rest to properly perform his or her duties while traveling away from home on business, or The meal is business-related entertainment. Lavish or extravagant meals are not deductible. However, an expense will not be disallowed merely because it is more than a fixed dollar amount. Facts and circumstances apply. EXAMPLE A truck driver is required to stop for sleep, but the only location available to stop at is at a resort and deluxe restaurant. The meal is deductible even though the cost is significantly greater than the cost at a normal truck stop restaurant. KEY FACT In general, the cost of meals is subject to a 50% deduction limit. However, see Special rules for transportation workers, page 10. The meal expense can be figured under one of the following methods: The actual cost. The standard meal allowance. The 50% limit (80% limit for certain transportation workers) applies to both methods. However, if the taxpayer is reimbursed for the cost of the meal, the application of the 50% limit depends on whether the reimbursement plan is an accountable or a non-accountable reimbursement plan. Under an accountable plan, the taxpayer reimbursed for the cost does not include the reimbursement in income and does not take a deduction for the expense. Under a nonaccountable plan, the taxpayer includes the reimbursement in income and takes a deduction for the expense, subject to the 50%/80% limits. TheTaxReview Transportation Industry and Truckers 9

15 NOTES Standard meal allowance. The standard meal allowance can be taken as an alternative of keeping records of the actual cost of meals. It allows the taxpayer to use a set amount for daily meals and incidental expenses, regardless of the actual cost of meals. However, the taxpayer must still keep records to prove the time, place, and business purpose of the travel. A truck driver s required log book for purposes of the federal hours of service requirements can serve this purpose. The standard meal allowance method can be used whether the taxpayer is an employee or self-employed, and whether or not he or she is reimbursed for traveling expenses. The standard meal allowance for 2015 is $46 per day for workers not in the transportation industry. Special rules for transportation workers. A special standard meal allowance is allowed for taxpayers in the transportation industry. A taxpayer is in the transportation industry if his or her work: Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and Regularly requires the taxpayer to travel away from home and, during any single trip, usually involves travel to areas eligible for different standard meal allowance rates. If this rule applies, the standard meal allowance for 2015 is $59 a day for travel within the continental United States, and $65 a day for travel outside the continental United States. 80% limit on meals. In addition to the special standard meal allowance for transportation workers, there is also an 80% limit on meal expenses rather than the 50% limit that applies to all other taxpayers. The 80% limit applies to taxpayers in the transportation industry who are subject to the Department of Transportation s hours of service limits rules, including: Certain air transportation workers, such as pilots, crew, dispatchers, mechanics, and control tower operators who are under Federal Aviation Administration regulations. Interstate truck operators and bus drivers who are under Department of Transportation regulations. Certain railroad employees, such as engineers, conductors, train crews, dispatchers, and control operation s personnel, who are under Federal Railroad Administration regulations. Certain merchant mariners who are under Coast Guard regulations. 10 TheTaxReview Transportation Industry and Truckers

16 Learning Objective C Self-Quiz For answer, see Self-Quiz Answers, page 19. Test your knowledge and comprehension of information presented in Learning Objective C. 3) Randy is an interstate truck operator under DOT regulations and is not reimbursed for meal expenses. Randy is subject to the following limits on deductible meal expenses: a) Actual expenses subject to a 50% limit. b) Per diem expenses of $59 per day in the continental U.S. subject to an 80% limit. c) Per diem expenses of $59 per day in the continental U.S. d) Per diem expenses of $46 per day in the continental U.S. NOTES Learning Objective D Apply taxpayer elections available under the tangible property regulations. A taxpayer is allowed to deduct all the ordinary and necessary expenses incurred during the taxable year in carrying on a trade or business, including the costs of certain materials, supplies, repairs, and maintenance. However, a taxpayer is required to capitalize the costs of acquiring, producing, and improving tangible property, regardless of the size or the cost incurred. The tax law has long required taxpayers to determine whether expenditures related to tangible property are currently deductible business expenses or non-deductible capital expenditures (subject to depreciation). The question whether to capitalize (and then depreciate) a cost versus deduct the cost as a repair is of particular interest for the trucking industry. Over the road trucking can require heavy use on the equipment and repair and maintenance costs can be relatively high. It is not unusual to have to replace the same part more than once over the class life of the truck. Tangible Property Regulations The tangible property regulations apply to anyone who pays or incurs amounts to acquire, produce, or improve tangible real or personal property. These regulations apply to corporations, S corporations, partnerships, LLCs, and individuals filing a Form 1040 with Schedule C, E, or F. The final regulations affect a taxpayer if he or she incurs amounts to acquire, produce or improve tangible real or personal property in carrying on a trade or business. These regulations are effective for taxable years beginning on or after January 1, De Minimis Safe Harbor Election Since the question to deduct or capitalize a part used to repair a truck can be a grey issue, the regulations allow a taxpayer to elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by the taxpayer for financial accounting purposes TheTaxReview Transportation Industry and Truckers 11

17 NOTES or in keeping books and records. If a taxpayer has an applicable financial statement (AFS), he or she may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item. If a taxpayer does not have an AFS, he or she may use the safe harbor to deduct amounts up to $500 per item or invoice. These limitations are for purposes of determining whether particular expenses qualify under the safe harbor. They are not intended as a ceiling on the amount that can be deducted as a repair. The de minimis safe harbor election eliminates the burden of determining whether every small expenditure for the acquisition or production of property is properly deductible or capitalized. If a taxpayer elects to use the de minimis safe harbor, he or she does not have to capitalize the cost of qualifying de minimis acquisitions or improvements. Costs that exceed the $5,000/$500 thresholds. Amounts paid for the acquisition or production of tangible property that exceed the safe harbor limitations aren t subject to the de minimis safe harbor election. Therefore, the safe harbor doesn t require a taxpayer to capitalize all amounts paid for tangible property in excess of the applicable limitation. If an amount doesn t qualify under the de minimis safe harbor, treat the amount under the normal rules that apply, i.e., currently deductible if paid for incidental materials and supplies or for repair and maintenance. This treatment is proper regardless of whether the amount exceeds the applicable de minimis safe harbor limitation. Applicable financial statement (AFS). An AFS includes a financial statement required to be filed with the SEC, as well as other types of certified audited financial statements accompanied by a CPA report, including a financial statement provided for a loan, reporting to shareholders, or for other non-tax purposes. An AFS also includes a financial statement required to be provided to a federal or state government or agency other than the IRS or the SEC. Accounting procedures. If the taxpayer does not have an AFS, he or she is not required to have written accounting procedures. However, a taxpayer must expense amounts on his or her books and records for the taxable year in accordance with a consistent accounting procedure or policy existing at the beginning of the taxable year. Policy to deduct amounts in excess of the de minimis safe harbor amount. If a taxpayer does not have an AFS but does have a policy for his or her books and records of deducting amounts more than $500, the taxpayer may properly deduct these amounts for federal tax purposes, as long as the taxpayer can show that his or her reporting policy clearly reflects income. In these situations, a taxpayer may want to elect the de minimis safe harbor for items costing $500 or less to assure that the deduction of the items costing $500 or less will not be questioned by the IRS. 12 TheTaxReview Transportation Industry and Truckers

18 KEY FACT The de minimis safe harbor election is made by attaching a statement titled Section 1.263(a)-1(f) de minimis safe harbor election to the timely filed original federal tax return including extensions for the taxable year in which the de minimis amounts are paid. The statement should include the taxpayer s name, address, and Taxpayer Identification Number, as well as a statement that the taxpayer is making the de minimis safe harbor election. Under the election, apply the de minimis safe harbor to all expenditures meeting the criteria for the election in the taxable year. An annual election is not a change in method of accounting. Therefore, do not file Form 3115, Application for Change in Method of Accounting, to use the de minimis safe harbor for a particular tax year, and do not file a Form 3115 to change the amount deducted under the taxpayer s book policy. Similarly, do not file a Form 3115 to stop applying the de minimis safe harbor for a subsequent tax year. NOTES Materials, supplies, repairs, and maintenance. In general, when a taxpayer elects the de minimis safe harbor, materials and supplies that also qualify under the de minimis safe harbor are treated as de minimis costs and are not treated as materials and supplies. However, the de minimis safe harbor doesn t change the taxpayer s ability to deduct costs for materials and supplies, incidental or non-incidental, that don t qualify under the de minimis safe harbor. Similarly, the de minimis safe harbor doesn t change the taxpayer s ability to deduct repair and maintenance costs that don t qualify under the de minimis safe harbor, e.g., costs that exceed the safe harbor threshold. Therefore, for costs that don t qualify under the de minimis safe harbor, apply the general rules for identifying and deducting repair and maintenance costs, incidental supplies, and non-incidental materials and supplies. Materials and Supplies In most cases, the regulations do not change the general rules for deducting materials and supplies. The regulations merely incorporate pre-existing precedents on the definition and treatment of materials and supplies and add some safe harbors to provide taxpayers with additional certainty. The regulations also provide additional elections and methods for those using rotable spare parts. Definition of materials and supplies. Materials and supplies are tangible, noninventory property used and consumed in the taxpayer s operations including: Acquired components. Costs of components acquired to maintain, repair, or improve tangible property owned, leased, or serviced by the taxpayer and that s not acquired as part of a larger item of tangible property, or Consumables. Costs of fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less, beginning when used in operations, or 12-month property. Costs of tangible property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer s operations, or $200 property. Costs of tangible property that has an acquisition cost or production cost of $200 or less. TheTaxReview Transportation Industry and Truckers 13

19 NOTES The property need only fit into one of the above categories to qualify as a material or supply. EXAMPLE #1 Jayne elects to use the de minimis safe harbor. She replaces a part that costs $490. The part is expected to last 10 years. The cost is currently deductible regardless of whether or not the part improves or extends the useful life of her truck because the cost does not exceed the $500 de minimis safe harbor threshold. EXAMPLE #2 Joe brings his truck in to the repair shop to have his truck lubricated. The total invoiced cost is $800. The cost is currently deductible as materials and supplies even though the invoiced cost exceeds the $500 de minimis safe harbor threshold. EXAMPLE #3 Jim has his truck repaired to replace a part that has an expected useful life of 12 months or less. The cost is currently deductible as materials and supplies regardless of the cost and regardless of whether he elected to use the de minimis safe harbor. Analyzing Whether Expenditures are for Deductible Repairs or Capital Improvements If the amounts are not paid or incurred for an improvement to tangible property, then the amounts generally are deductible as repairs and maintenance. Whether a cost is for repair or an improvement requires reviewing facts and circumstances. Use the following steps to determine the facts and circumstances of a particular cost. Step 1 What is the unit of property to which the improvement rules apply? For non-buildings, the unit of property is, and the analysis applies to, all components that are functionally interdependent. For example, truck tires are interdependent with the truck that they are installed on. Therefore, a truck and its tires are considered one unit of property. Step 2 Is there an improvement to the unit of property? A unit of tangible property is improved only if the amounts paid are: For a betterment to the unit of property, or To restore the unit of property, or To adapt the unit of property to a new or different use. Betterments include: Fixing a material condition or material defect that existed before the acquisition or arose during production. A material addition in terms of size or a major component or a material increase in capacity. A material increase factors such as output, productivity, efficiency, or quality. 14 TheTaxReview Transportation Industry and Truckers

20 Restorations include: Replacement of a major component or substantial structural part. Recognition of gains or losses and basis adjustments. Restoration to ordinary efficient operating condition from a state of disrepair. Rebuilding to like-new condition. Adaptations include: A new or different use not consistent with the ordinary use of the unit of property when it was originally placed it in service. NOTES Safe Harbor for Routine Maintenance A taxpayer is not required to capitalize as an improvement, and therefore may deduct, amounts that meet all of the following criteria: Amounts paid for recurring activities that the taxpayer expects to perform, As a result of the taxpayer s use of the property in his or her trade or business, To keep the property in its ordinarily efficient operating condition, and The taxpayer reasonably expects, at the time the property is placed in service, to perform the activities: For building structures and building systems, more than once during the 10-year period beginning when placed in service, or For property other than buildings, more than once during the ADS class life of the unit of property. If the amount doesn t meet all of the requirements for the routine maintenance safe harbor, the taxpayer may still deduct the amount if the amount is not for an improvement under the facts and circumstances analysis. EXAMPLE Crys drives a semi that has a class life of four years under the alternative depreciation system (ADS). She drives over 100,000 miles per year and expects to replace the tires more than once during those four years. Under the routine maintenance safe harbor, she can currently deduct the cost of replacement tires regardless of their cost. Exceptions: The routine maintenance safe harbor doesn t apply to amounts paid for betterments. The routine maintenance safe harbor does apply to certain restorations that would otherwise be improvements, including when amounts are paid to replace a major component or substantial structural part of a unit of property. Election to Capitalize Repair and Maintenance Costs To reduce the difficulty with applying the facts and circumstances analysis to identify the tax treatment of costs and to recognize simpler administration by permitting a taxpayer to follow financial accounting policies for federal tax purposes, the regulations include an election to capitalize repair and maintenance expenses as improvements, if such costs are treated as capital expenditures for financial accounting purposes. TheTaxReview Transportation Industry and Truckers 15

21 NOTES A taxpayer may elect to treat repair and maintenance costs paid during the taxable year as amounts paid to improve property if the taxpayer: Pays these amounts in carrying on a trade or business, and Treats these amounts as capital expenditures on his or her books and records regularly used in computing income. Makes the election to capitalize for each taxable year in which qualifying amounts are incurred by attaching a statement to a timely filed original federal tax return including extensions for the taxable year that the amounts are paid. If the taxpayer makes the election to capitalize repair and maintenance expenses, apply the election to all amounts paid for repair and maintenance that are treated as capital expenditures on the taxpayer s books and records in that taxable year. An annual election is not a change in method of accounting. Therefore, do not file Form 3115, Application for Change in Method of Accounting, to make this election or to stop capitalizing repairs and maintenance costs for a subsequent year. Learning Objective D Self-Quiz For answer, see Self-Quiz Answers, page 19. Test your knowledge and comprehension of information presented in Learning Objective D. 4) The tangible property regulations provide for a de minimis safe harbor election for the deduction of certain amounts for the acquisition or production to tangible property and a safe harbor election for the deduction of routine maintenance. The limit for the acquisition or production of tangible property for a taxpayer without an applicable financial statement is: a) $5,000 per item or invoice. b) $5,000 total for all items. c) $500 per item or invoice. d) $500 total for all items. 16 TheTaxReview Transportation Industry and Truckers

22 Learning Objective E NOTES Compute heavy vehicle use tax. A use tax is imposed on any highway motor vehicle which, together with the semi-trailers and trailers customarily used in connection with highway motor vehicles of the same type has a taxable gross weight of at least 55,000 pounds. Rate of Heavy Vehicle Use Tax The tax period for the Heavy Vehicle Use Tax runs from July 1 through June 30. Taxable Gross Weight Rate of Tax At least 55,000 pounds, but not over 75,000 pounds. $100 per year plus $22 for each 1,000 pounds (or fraction thereof) in excess of 55,000 pounds. Over 75,000 pounds. $550 The tax is imposed on the person in whose name the highway motor vehicle is registered (or required to be registered) under state law, the District of Columbia, Canadian, or Mexican law. If the vehicle is owned by the United States, the tax is imposed on the agency operating the vehicle. Proration of tax. The tax is prorated for the year under the following conditions: The first use of the vehicle during the tax year is after the first month of the tax period. In the case of first use, prorated tax includes the month of first use. The vehicle is sold, destroyed, or stolen before the first day of the last month of the tax period. Seller. If the vehicle use tax for the full year has been paid and the vehicle is sold during the year, the seller can claim a credit by multiplying the tax paid by a fraction. The numerator is the number of months from the first day after the month of sale through the end of the tax period and denominator is the number of months in the entire tax period (twelve, in this case). Buyer. The buyer pays the full period tax times a fraction. The numerator is the number of months from the first day after the month of the purchase through the end of the tax period and denominator is the number of months in the entire tax period (twelve, in this case). Expiration. The heavy vehicle use tax is currently set to expire for use starting on October 1, However, the provision was originally enacted as a temporary provision in 1956 and has been extended numerous times ever since. Form 2290 The tax is paid by filing Form 2290, Heavy Highway Vehicle Use Tax Return, and its related schedules. Form 2290 must be filed for the month the taxable vehicle is first used on public highways during the current period. Each period begins July 1 and ends the following June 30. Form 2290 must be filed by the last day of the month following the month of first use. TheTaxReview Transportation Industry and Truckers 17