Our tax expert responds to a common question we receive from drivers and fleets.

Substantiated provides the largest benefit to a driver. Decades before the advent of TMS software, telematics and ELD's fleets adopted cent-per-mile per diem for reimbursable employee travel expenses because it was easy to calculate and substantiate using trip sheets[i].  However, there is no correlation between the miles a driver travels and frequency of meal breaks. Under the cent-per-mile method a driver is paid only for miles driven and not nights away from home. Although, a driver may travel 500 miles one day but only 200 miles the next, the distance traveled does not affect the need to eat 3 meals a day. The IRS introduced the Special Transportation Industry substantiated per diem to simplify tax compliance for fleets by relying on days away from home instead of miles traveled. This method accurately reflects the number of meals a driver eats and resolved the problem that driver’s regularly travel away from home and stop during a single trip at localities with differing federal M&IE rates.

  • The most beneficial aspect to a driver is that substantiated method at $66/day yields on average 45% more per diem than cent-per-mile.
  • Substantiated per diem can be earned during a 34-hour restart and unforeseen delays like detention, breakdowns, or weather.
  • A typical driver will save an additional $1,100 - $1,400 in income and payroll taxes over cent-per-mile.
  • Fleets that implement the Per Diem Plus FLEETS platform will save about 37% or $800 more per driver in reduced payroll and income taxes and workers compensation than cent-per-mile.

[i] 1-274-5T(c) Rules of substantiation, Rev. Proc. 2011-47 § 4.02(5)



While, both the substantiated and cent-per-mile per diem methods are IRS-compliant, neither method has been considered a wage reclassification for 30 years. However, a motor carrier that adopts the substantiated per diem method that is built into Per Diem Plus FLEETS will realize the most benefit for both the fleet and their drivers.


This article was written by Mark W. Sullivan EA, Tax Counsel for Per Diem Plus, who has over a decade of experience advising trucking companies on per diem issues. Prior to starting a private practice in 1998, Mr. Sullivan was an Internal Revenue Officer with the New York, NY, Saint Louis, MO and Washington, D.C. offices of the Internal Revenue Service. 

Questions? Contact Mark W. Sullivan, EA.

Disclaimer: This article is for information purposes only and cannot be cited as precedence or relied upon in a tax dispute before the IRS.

Our tax expert responds to a common question we receive from fleets.

Substantiated per diem provides the largest benefit to a motor carrier over the cent-per-mile method, since the savings are directly proportional to total per diem paid to drivers.  So how did cent-per-mile per diem become so popular in the trucking industry? Decades before the advent of TMS software, telematics and ELD's fleets adopted cent-per-mile per diem for reimbursable employee travel expenses because it was easy to calculate using trip sheets.  However, there is no correlation between the miles a driver travels and meal breaks.

So why do drivers prefer substantiated special trucker per diem? They eat 3 meals a day regardless of whether they drive 200 or 600 miles. The IRS introduced the Special Transportation Industry substantiated per diem to remedy this issue and simplify tax compliance for fleets by relying on nights away from home instead of miles traveled, which is a more accurate reflection of anticipated meal expenses.

The most beneficial aspect to a motor carrier is that: 

  •  Substantiated method yields on average 37% more per diem savings than cent-per-mile or $1 for every $8 of per diem paid to driver over cent-per-mile.
  • The average fleet saves about $2,694 per driver in income and employment taxes and workers compensation.
  • A fleet employing 5 OTR drivers would save about $3,620 more with substantiated per diem than cent-per-mile.

Adding an accountable per diem program for employee drivers is a sure-fire way to enhance driver recruiting and retention. Consider the following:

  • The typical over-the-road (OTR) driver averages 127,500 miles annually and is away from home 280 nights a year.
  • A driver would receive $18,480 of tax-free per diem under the substantiated method, but only $12,750 under a cent-per-mile method.
  • Substantiated method yields on average 45% more per diem than cent-per-mile and can be earned during a 34-hour restart and unforeseen delays like detention, breakdowns, or weather.
  • The average driver will save an additional $1,126 - $1,467 in income and payroll taxes over cent-per-mile.

Both substantiated and cent-per-mile per diem must comply with the IRS substantiation by adequate records rules which state, "a motor carrier must maintain log books (ELD back-ups), trip sheets, or similar record,  to establish "time, place and location" for each per diem event". The Per Diem Plus FLEETS platform satisfies this requirement since it is maintained in such manner that each recording of an element of an expenditure is made at or near the time of the expenditure.

Document retention rules - Per Diem Plus FLEETS utilizes a 4-year retention policy, while a  fleet must retain driver log data for a minimum of 3 years from the filing date of the corporate tax return.

The transportation industry has been unique in its treatment of driver per diem for over 30 years. While, substantiated and cent-per-mile per diem methods are IRS-compliant, both require a motor carrier to comply with the adequate records and document retention rules.  However, a motor carrier that adopts the substantiated per diem method utilized by Per Diem Plus FLEETS will realize the most benefit for the fleet and their drivers.


This article was written by Mark W. Sullivan EA, Tax Counsel for Per Diem Plus, who has over a decade of experience advising trucking companies on per diem issues. Prior to starting a private practice in 1998, Mr. Sullivan was an Internal Revenue Officer with the New York, NY, Saint Louis, MO and Washington, D.C. offices of the Internal Revenue Service.  Questions? Contact Mark W. Sullivan, EA.

Disclaimer: This article is for information purposes only and cannot be cited as precedence or relied upon in a tax dispute before the IRS.

No. The treatment of per diem as a portion of an employee’s wages has been unique to the transportation industry since at least 1989 and is not considered an improper “wage reclassification”. The IRS first introduced per diem (per day) allowances in Revenue Procedure 90-60 - a simplified method of substantiating employee business expenses - in accordance with the Family Support Act of 1988.  However, the Special Transportation Industry substantiated per diem method was not introduced until 2000 [See Rev. Proc. 2000-39, 2000-9 Sec. 4.04, Notice 2000-48], which among other things:

  • Established a method allowing a payor to treat a specific amount as paid or incurred for employee meals while traveling away from home for work instead of substantiating actual costs (no receipts required).
  • Set $40 as the nationwide federal meals and incidental expenses (M&IE) rate for transportation employees subject to DOT hours of service. [Increased to $66 in 2018] [i]
  • Increased the tax-deductible percentage of employee travel expenses to 60%. [Raised to 80% in 2008] [ii]
  • Approved as a transportation industry standard prior to December 12, 1989 the treatment of a portion of a driver’s wages as per diem. [iii]
  • Required a fleet using the cent-per-mile method to include a process that;
    • tracks the amount of cents-per-mile M&IE allowance paid to a driver on a per diem basis,
    • includes a mechanism to determine when allowances exceed the amount of expenses that may be deemed substantiated, and
    • treat the excess allowance over $40 per day as wages for withholding or employment tax purposes. [Increased to $66 in 2018][iv]
  • Established that all amounts paid under a per diem arrangement that meets the requirements of business connection, substantiation, and returning amounts in excess of expenses are treated as paid under an accountable plan and are excluded from income and wages.

The Internal Revenue Code gives the IRS Commissioner discretionary authority to issue regulations, such as revenue rulings and procedures, to ease the burden on taxpayers, who would otherwise have to meet the extensive substantiation requirements in order to claim deductions for business related travel. The Commissioner updates these Revenue Procedures annually, but the relevant per diem provisions have remained substantially the same since 2000. However, in 2012 the IRS issued Revenue Ruling 2012-25, which is inapplicable to transportation industry, in response to an emerging trend whereby businesses that did not historically offer per diem were implementing abusive plans that recharacterized taxable wages as nontaxable reimbursements or allowances. In three of the four situations listed in the revenue ruling the employer failed to fulfill the business connection requirement of the regulations:

  1. A cable TV contractor offered a tool reimbursement that reduced hourly compensation that was offset with an hourly tool rate. Once a technician had received tool plan payments for the total amount of his or her tool and equipment expenses, the employer ceased paying the technician an hourly tool rate and increased the technician’s hourly compensation to the pre-tool plan hourly compensation rate.
  2. A nurse staffing contractor compensated all of the nurses on an hourly basis and the hourly compensation amount did not vary depending on whether the hospital was located away from the assigned nurse’s tax home. The employer treated a portion of the nurses’ hourly compensation as a nontaxable per diem allowance only when hospitals assignments required them to travel away from their tax home. This situation is similar to that in Beech Trucking, Inc. v. IRS (USTC 2002) where the company paid per diem to both over-the-road and short haul truck drivers who returned home nightly.
  3. A construction company’s workers were required to travel between construction sites or otherwise use their personal vehicles for business purposes. The employer paid all of its workers, including those who were not required to travel or otherwise use their personal vehicles for employer’s business, a flat amount per pay period that was treated as a nontaxable mileage reimbursement.
  4. A cleaning services company that employed cleaning professionals that provided their own cleaning supplies to perform house cleaning services. The employer properly adjusted hourly compensation and reimbursed employees only for substantiated clean supply expenses.

The employer’s cited in the Rev. Ruling 2012-25 failed to fulfill the business connection requirement of the regulations because they took liberties with IRS published guidance and ignored the limitations set forth in Rev. Proc. 2011-47 Section 3.03(2) which states in part, “An allowance that is computed on a basis similar to that used in computing an employee's wages or other compensation does not meet the business connection requirement unless, as of December 12, 1989, (a) the allowance was identified by the payor either by making a separate payment or by specifically identifying the amount of the allowance, or (b) an allowance computed on that basis was commonly used in the industry in which the employee performed services.” Furthermore, neither cable contractors, nurses, construction workers or house cleaners enjoy industry-specific rules prescribed by the IRS Commissioner like those covering the transportation industry introduced in Rev. Proc. 2000-9 Section 4.04 that established the Special Transportation Industry per diem[i].


Example 1. A truck driver employee travels away from home on business for 24 days during a calendar month. A payor pays him the $66 special trucking daily allowance for meal and incidental expenses only. The amount deemed substantiated is the total per diem allowance paid for the month or $1,584 (24 days away from home at $66 per day).

Example 2. A truck driver is paid a 10 cents-per-mile per diem allowance based on the number of miles driven. He travels away from home for 24 days but only drives for 20. Driver’s employer pays an allowance of $1,000 for the month based on 2500 miles per week. The amount deemed substantiated is the full $1,000 because that amount does not exceed $1,584 (24 days away from home at $66 per day).


Which provides the largest benefit to a driver, substantiated or cent-per-mile per diem?

Although, a driver may travel 600 miles one day but only 200 miles the next, the distance traveled does not affect the need to eat 3 meals a day. Thus, the IRS introduced the Special Transportation Industry substantiated per diem to simplify tax compliance for fleets by relying on nights away from home instead of miles traveled.

The most beneficial aspect to a driver is that:

  • Substantiated method yields on average 45% more per diem than cent-per-mile.
  • Substantiated per diem can be earned during a 34-hour restart and unforeseen delays like detention, breakdowns, or weather.
  • The average driver will save an additional $1,126 - $1,467 in income and payroll taxes over cent-per-mile.

Thirty years of IRS guidance and legislative history specifically reference an employer paying a driver in the transportation industry under the substantiated method and, therefore, contemplate that some portion of a driver’s wages will be treated as per diem. While, both the substantiated and cent-per-mile per diem methods are IRS-compliant, neither method has been considered a wage reclassification for over 30 years. However, a motor carrier that adopts the substantiated per diem method that is built into Per Diem Plus FLEETS will realize the most benefit for both the fleet and their drivers.


This article was written by Mark W. Sullivan EA, Tax Counsel for Per Diem Plus, who has over a decade of experience advising trucking companies on per diem issues. Prior to starting a private practice in 1998, Mr. Sullivan was an Internal Revenue Officer with the New York, NY, Saint Louis, MO and Washington, D.C. offices of the Internal Revenue Service.  Questions? Contact Mark W. Sullivan, EA.

Disclaimer: This article is for information purposes only and cannot be cited as precedence or relied upon in a tax dispute before the IRS.

[i] The 2019 per diem rate for travel in the USA is $66 and $49.50 for a partial day.

ii] The raised the deductible percentage of employee travel related expenses to 80% in 2008

iii] Federal Register-1989-12-12 Vol 54 Page 51038 pursuant to “Family Support Act of 1988”

[iv] Rev. Ruling 2006-56, 2006-2 CB 274

[i] Updated annually IRS Notice 2018-77, 2017-54, 2016-58, 2015-63, 2014-57, 2013-65, 2012-63, Rev. Proc. 2011-47, 2010-39, 2009-47, 2008-59, 2007-63, 2006-41, 2005-67, 2004-60, 2003-80, 2002-63 and 2001-47.

PER DIEM PROGRAM SAVES MOTOR CARRIER $3,000 PER DRIVER

"Partnering with Per Diem Plus provided us a turn-key solution configured to meet the needs of our fleet and offer this benefit to our drivers who love our new per diem app."
Nick A., Controller

ABOUT:

With over 400 power units the motor carrier is a leader among specialized companies serving the United States and Canada.

THE CHALLENGE:

The Controller was looking for a solution to two significant challenges impeding growth. The first involved reducing driver turnover and the second was raising driver pay in a tight labor market to improve driver recruiting.

REASONS:

    • The 2017 Tax Cuts and Jobs Act eliminated the ability of employee drivers to claim per diem as a tax deduction on their individual income tax return.
    • The absence of a company-sponsored per diem program increased driver turnover and hampered recruiting.
    • Creating IRS-compliant contemporaneous per diem records from ELD back ups is immensely time consuming.

WHAT CUSTOMER NEEDED:

    • An IRS-compliant mobile application platform solution that would allow for rapid deployment with minimal investment in dollars and/or IT resources.
    • An interface to manage individual and team drivers operating both ELD-exempt and non-exempt trucks that would be easy-to-use for non-technical users.
    • A scalable,  secure, cloud-based solution to meet the growing needs of their fleet.
    • Automated administration of a company-paid accountable per diem program.

THE PER DIEM PLUS SOLUTION:

The only IRS-compliant mobile application platform that automated administration of an accountable trucker per diem plan.

  • Fleet-branded Android & iOS mobile apps that individual and team drivers could use on their own device or install on fleet-owned devices.
  • Formatted per diem payroll reports streamlining the burdensome IRS tax compliance regulations.
  • Eliminated the need to retain over 100,000 pages annually of ELD / AOBRD backups for no less than IRS-required 3 years.
  • Superior driver support through our US-based Driver Success Team via Phone, Text and/or Email.
  • A “Never Lost” retention policy that insures fleet per diem data is instantly available for 4 years.

RESULTS:

  • The fleet is saving $3,000 per driver annually through reduced income and payroll taxes and workers compensation.
  • The tax-free per diem program increased Married drivers pay by 2.8 cents per mile and Single drivers pay by 4.2 cents per mile.
  • Driver turnover is down to 15%.
  • The program launched in 21 days including tech implementation and driver training.

The carrier was able to increase driver pay AND reduce expenses through implementing their per diem program with Per Diem Plus FLEETS.

Questions? Contact Mark W. Sullivan Program Manager - Per Diem Plus FLEETS

About: Per Diem Plus FLEETS is a proprietary mobile software application that was designed by truckers and built by tax pros. It is the only IRS-compliant mobile app that automatically tracks each qualifying day of travel in the USA & Canada and replaces ELD backups (logbooks) to substantiate away-from-home travel.

Our tax experts jotted down some common per diem questions that fleet customers have asked us.

“Partnering with Per Diem Plus provided us a turn-key solution configured to meet the needs of our fleet” 

Nick A., Controller

FLEETS PRODUCT SHEET

What is per diem?

The term"per diem allowance" means a payment under a reimbursement or other expense allowance arrangement that is —
(1) Paid for ordinary and necessary business expenses incurred, or that the payor reasonably anticipates will be incurred, by an employee for meal and incidental expenses, for travel away from home performing services as an employee of the employer.
(2) Paid at or below the applicable transportation industry per diem rate.

A per day travel expense allowance eliminates the need for proving actual costs for meals & incidental expenses incurred.

Under the 2017 Tax Cuts & Job Act can motor carriers still offer per diem to employee drivers? 

Yes. Drivers that receive a non-taxable per diem reimbursement from their employer (trucking company) do so under IRC Sec 62(2)(a)

Which employee drivers qualify for per diem?
A motor carrier can offer per diem only to drivers who are:

  • Subject to DOT HOS, 
  • Who travel away from home overnight where sleep or rest is required, and 
  • Do not start and end a trip at home on the same DOT HOS 14-hour work day.

Can all truck drivers receive per diem?
No. Drivers who start and end a trip at home on the same DOT HOS 14-hour work day cannot receive per diem. As of January 1, 2018 employee (company) drivers can no longer claim per diem on their Form 1040, US Income Tax Return, as an itemized deduction on Schedule A.

Is your fleet interested in adopting an IRS-compliant, accountable per diem program? Checkout FLEETS PRODUCT SHEET

What is the cost to a fleet (non-deductible portion of per diem) of a company-paid per diem plan for employee drivers? 

The nondeductible portion of per diem is approximately $0.016/mile  @ 2500 miles / week. 

Will a company-paid per diem plan raise driver pay?  

Yes. On average driver pay will increase by $0.026 - $0.039 per mile @ 2500 miles / week.

What documentation is required to prove overnight travel and expenses?
A fleet must substantiate the “time, date, and place” for each day of travel.  Here is how the IRS-friendly Per Diem Plus FLEETS web services portal output report handles this requirement:

What documentation meets the IRS substantiation requirements?
Only Per Diem Plus FLEETS platform or DOT ELD backups with an itemized log listing "time, date & place" for each per diem event. Per Diem Plus automatically records per diem for travel in the USA and Canada for solo and team drivers.

Is company-paid per diem taxable as income to an employee driver under an accountable fleet per diem plan?

No. Per diem is classified as a non-taxable reimbursement to an employee driver and is not reported under wages on Form W-2.

Would IRS argue that per diem was a "wage recharacterization"?
No. The treatment of per diem as a portion of an employee’s wages is unique to the transportation industry and is not considered a wage reclassification for the foregoing reasons.   
  • The industry has for decades classified a portion of a driver’s cent-per-mile pay as non-taxable per diem, which IRS sanctions in Rev. Proc. 2011-47 3.03(2).
  • An allowance that is computed on a basis similar to that used in computing an employee's wages or other compensation (such as the number miles traveled) does not meet the business connection requirement of IRC1.62-2(d), is not a per diem allowance, and is not paid at a flat rate or stated schedule, unless, as of December 12, 1989, an allowance computed on that basis was commonly used in the industry in which the employee performed services. See IRC 1.62-2(d)(3)(ii).

What are the current per diem rates for travel in USA & Canada?
IRS increased per diem rates effective October 1, 2018

USA $66 from $63

Canada $71 from $68

Can a fleet prorate per diem for partial days of travel?
Yes. A partial day is 75% of the per diem rate (USA $49.50 Canada $53.25).

  • Per Diem Plus will record 3/4 per diem when a driver departs their tax home AFTER noon or returns to their tax home BEFORE noon. See IRS Rev. Proc. 2011-47.6.04.

How much per diem can a fleet deduct on the corporate income tax return?
A fleet can deduct 80% of per diem on their income tax return.

What documentation is required to prove other expenses?
Paper or electronic receipts that identify what, when and the amount are required. Drivers can upload and store receipts on the Per Diem Plus FLEETS app.  Watch Run IRS Compliant Reports with Receipts video to see how easy drivers can send an itemized expense reports with receipts to payroll or accounting.

Can a fleet pay per diem for lodging?
No. There is no published guidance from IRS that allows a fleet to pay a lodging per diem.  

A self-employed driver (owner operator) falls under the related party rules of IRC 267(b) & Rev. Proc 2011-47.6.07 and, therefore, cannot use per diem substantiation that includes a meals and lodging per diem.

How long should tax records be retained?
No less than 3 years from the filing date of an income tax return.  Per Diem Plus FLEETS customers have instant access to itemized per diem tax records for four years.

What published guidance has the IRS issued that explains trucker per diem?

Refer to IRS Revenue Procedure 2011-47.  Or, use the Per Diem Plus FLEETS platform that automates administration of a company-paid per diem plan and takes the guesswork out of tax-related record keeping.  Our How it Works video demonstrates just easy the app is to use.

This article was written by Mark W. Sullivan EA, Tax Counsel for Per Diem Plus, who has over a decade of experience advising trucking companies on per diem issues. Prior to starting a private practice in 1998, Mr. Sullivan was an Internal Revenue Officer with the New York, NY, Saint Louis, MO and Washington, D.C. offices of the Internal Revenue Service.  Questions? Contact Mark W. Sullivan, EA.
Disclaimer: This article is for information purposes only and cannot be cited as precedence or relied upon in a tax dispute before the IRS.

Part 2: Tax Saving Tips For Owner Operators & Family-Run Trucking Businesses

The following excerpt is from "Making The IRS Work In Your Favor" presented by Mark W. Sullivan, EA at the CMC LIVE hosted by Kevin Rutherford and Let's Truck.

Taxpayers are not entitled to deduct any expenses for using their home for business purposes unless the expenses are attributable to a portion of the home, or a separate structure, used exclusively on a regular basis.  Here is what you need to know to take advantage of a great tax saving opportunity.

The Home Office Deduction

Who can claim the home office deduction?

Only self-employed individuals may claim home office deduction.

  • Sole proprietorships claim it on Form 1040 Schedule C
  • S-corporations claim it as an office expense on Form 1120S

The IRS has two tough tests to meet:

  1. Statutory Administrative / Management Activities Test
  2. Comparative Analysis Test

Administrative / Management Activities Test

Portion of home used exclusively

  • Billing customers
  • Keeping books and records
  • There is no fixed office location

Comparative Analysis Test

  • Determining principal place of business
  • Importance of activities performed at home office
  • Time spent at location

(Refer to IRC Sec 280A(a), 280A(c), 280A(c)(1)(A))

Example
Using a den to write legal briefs and tax opinions as well as for personal purposes does not meet the requirements to claim the home office deduction.
  • Fails the Comparative Analysis Test - Importance of activities performed at home office

Calculating The Home Office Deduction

Two options:

  1. Safe Harbor Method
  2. Allocable Portion of Home Method

Safe Harbor Method

  • Calculate percentage of home or structure used for business
  • $5 per square foot, up to maximum of 300 sq. ft. or $1500
  • Deduction cannot exceed business income

Allocable Portion Of Home Method

  • Calculate percentage of home or structure used for business
  • Multiply by total costs of maintaining home
  • Deduction cannot exceed business income

(Refer to IRC Sec 280A(c)(5)(A))

Questions? Email Mark W. Sullivan, EA.


About: Per Diem Plus is a proprietary mobile software application that was designed by truckers and built by tax pros. It is the only IRS-compliant mobile app that automatically tracks each qualifying day of travel in the USA & Canada and replaces ELD backups (logbooks) to substantiate away-from-home travel.

Start your 30-day FREE trial with no credit card required today!

Download Per Diem Plus for iOS HERE

Download Per Diem Plus for Android HERE

This article was written by Mark W. Sullivan, EA, Tax Counsel to Per Diem Plus, LLC and Of Counsel to Schroeder & Associates and leads the highly specialized Tax Controversy Group. His practice is concentrated in the areas of Federal tax controversies and litigation support/expert witness services in tax and other white collar cases. He also advises on tax planning and consulting for businesses and individuals. Mark has 25 years of experience in Federal Collection, Examination and Appeals representation.

Prior to starting a private practice in 1998, Mark was an Internal Revenue Officer with the New York, NY, Saint Louis, MO and Washington, D.C. offices of the Internal Revenue Service

Disclaimer

This article includes general tax information, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case. Please consult with a licensed tax professional.

Tax Saving Tips For Owner Operators & Family-Run Trucking Businesses

The following excerpt is from "Making The IRS Work In Your Favor" presented by Mark W. Sullivan, EA at the CMC LIVE  hosted by Kevin Rutherford and Let's Truck.

Trucking like any small business is often a family affair. My son started working in my accounting practice after school when he was 10 - shredding paper, stamping and stuffing envelopes. Whether you are a solo owner operator or run a trucking company, it is not uncommon to put your kids to work helping in the business.  Here is what you need to know to take advantage of a great tax saving opportunity.

Paying Your Kids To Work In The Business

First and foremost: Your children must be bona fide employees

  • Their work must be ordinary and necessary
  • Pay must be for services actually performed
  • Services appropriate for your business
  • Any real work for your business can qualify
    • Examples: answering phones, helping with your website, stuffing envelopes, or cleaning the office
    • IRS has accepted that a seven-year-old child may be an employee
  • Duties should be related only to your business

What does IRS require for you to claim a child as an employee? 

  • Keep track of the hours your child works
  • Have a written employment agreement specifying his or her job duties and hours

WARNING:

  • No business deductions for personal services, such as babysitting or mowing your lawn at home
  • Money you pay for yard work performed on business property could be deductible as a business expense

There are different rules for Sole Proprietor / Partnership and S-Corporations

Sole Proprietorship / Partnerships

Children under 21 wages subject to income tax withholding, but not :

  • Social Security
  • Medicare
  • FUTA

Corporations

Children under 21 are subject to:

  • Income tax withholding
  • Social Security
  • Medicare
  • FUTA

Tax Savings Opportunity

Standard deduction for SINGLE filers raised from $6,350 to $12,000.

  • A child could earn up to $12,000 tax free

Example: Employment Tax on Wages of $12,000

Sole-Proprietor

Corporation

FICA / Medicare / FUTA 16.8% $0.00

$2,016

Reference Material:

Refer to: https://www.irs.gov/businesses/small-businesses-self-employed/family-help

Questions? Email Mark W. Sullivan, EA.


About: Per Diem Plus is a proprietary mobile software application that was designed by truckers and built by tax pros. It is the only IRS-compliant mobile app that automatically tracks each qualifying day of travel in the USA & Canada and replaces ELD backups (logbooks) to substantiate away-from-home travel.

Start your 30-day FREE trial with no credit card required today!

Download Per Diem Plus for iOS HERE

Download Per Diem Plus for Android HERE

This article was written by Mark W. Sullivan, EA, Tax Counsel to Per Diem Plus, LLC and Of Counsel to Schroeder & Associates and leads the highly specialized Tax Controversy Group. His practice is concentrated in the areas of Federal tax controversies and litigation support/expert witness services in tax and other white collar cases. He also advises on tax planning and consulting for businesses and individuals. Mark has 25 years of experience in Federal Collection, Examination and Appeals representation.

Prior to starting a private practice in 1998, Mark was an Internal Revenue Officer with the New York, NY, Saint Louis, MO and Washington, D.C. offices of the Internal Revenue Service

Disclaimer

This article includes general tax information, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case. Please consult with a licensed tax professional.

20% Passthrough Deduction for Qualified Business Income

Internal Revenue Code Section 199A generally provides a deduction of 20% of qualified business income (QBI) derived from a sole proprietorship, partnership or S corporation that is a qualified trade or business, like a trucking business. The Sec 199A deduction is taken from adjusted gross income (AGI) in determining taxable income and therefore does not reduce self-employment income. Most eligible taxpayers will be able to claim it for the first time when they file their 2018 federal income tax return in 2019. The deduction is available, regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.

The 199A deduction is complicated!  The estimated average annual burden hours per taxpayer is 2.5 hours, thus taxpayers are advised to seek professional tax guidance when calculating the deduction for their business. 

The section 199A deduction is the lesser of:

  1. The combined qualified business income (QBI), or
  2. 20% of the excess (if any) of
    • Taxpayer’s taxable income for the year over
    • Taxpayer’s net capital gain

WARNING: Section 199A deduction:

  • Is not available for wage income or business income earned through a C corporation
  • Qualified business loss from a separate business reduces QBI by 20% as well

Qualified Business Income (QBI) is defined at Sec 199A(c) as the net amount of qualified items of income, gain, deduction, and loss for a tax year with respect to any qualified trade or business of the taxpayer.

Example 1

  • Harvey Trucker, is single
  • Sole Proprietor
  • Has Schedule C business income of $150,000
  • Income below $157,500 threshold
  • $150,000 from Sch. C is QBI
  • $150,000 x 20% = $30,000 pass-through deduction

Example 2

  • Harvey Trucker, is single
  • Sole shareholder and employee of S corporation
  • Pays himself $80,000 of wages
  • Has K-1 business income of $50,000
  • Income below $157,500 threshold
  • Wages are not qualified business income
  • $50,000 from K-1 is QBI
  • $50,000 x 20% = $10,000 pass-through deduction

Example 3 - Disparities from Entity Choice

  • Assume Harvey’s taxable income is $150,000, all from the business
  • S-Corp: He pays himself $100,000 of wages
  • As a sole proprietor Harvey has $150,000 of QBI and a QBID of $30,000 ($150,000 x 20%)
  • With the S corporation, however, Harvey has only $50,000 of QBI and a QBID of $10,000 ($50,000 x 20%)

What line do you report the deduction on Form 1040?

Line 9 of the Form 1040 for 2018 (draft). IRS will be issuing new tax returns, worksheets and other tools to assist individuals and businesses with their deduction calculation and tax preparation. DOWNLOAD 2018 DRAFT F1040 101718

Who is eligible for the deduction?

Small businesses with qualified income below:

  • $315,000 for married couples filing jointly
  • $157,500 for single filers

When is the deduction modified?

Small business qualified income exceeds:

  • $315,000 - $415,000 for married couples filing jointly
  • $157,500 - $207,500 for single filers

How do S corporations and partnerships handle the deduction?

S corporations and partnerships are generally not taxpayers and cannot take the deduction themselves. However, all S corporations and partnerships report each shareholder’s or partner’s share of QBI and W-2 wages on Schedule K-1 so the shareholders or partners may determine their deduction.

Questions? Contact Mark W. Sullivan, EA HERE


About: Per Diem Plus is a proprietary mobile software application that was designed by truckers and built by tax pros. It is the only IRS-compliant mobile app that automatically tracks each qualifying day of travel in the USA & Canada and replaces ELD backups (logbooks) to substantiate away-from-home travel.

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This article was written by Mark W. Sullivan, EA, Tax Counsel to Per Diem Plus, LLC and Of Counsel to Schroeder & Associates and leads the highly specialized Tax Controversy Group. His practice is concentrated in the areas of Federal tax controversies and litigation support/expert witness services in tax and other white collar cases. He also advises on tax planning and consulting for businesses and individuals. Mark has 25 years of experience in Federal Collection, Examination and Appeals representation.

Prior to starting a private practice in 1998, Mark was an Internal Revenue Officer with the New York, NY, Saint Louis, MO and Washington, D.C. offices of the Internal Revenue Service

Reference: 2017 Tax Cut & Job Act, Kenneth K. Wright (2018)

Disclaimer

This article includes information is not included in the Internal Revenue Bulletin 2018-64, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

The transportation workers’ special standard per diem rate has been increased to $66 from $63. For travel to Canada the rate increased from $68 to $71 per day.

The new rate becomes effective October 1, 2018.

Have questions about trucker per diem? Contact us at info@perdiemplus.com

MAKING THE IRS WORK IN YOUR FAVOR

Presented by Mark W. Sullivan, EA - Tax Counsel for Per Diem Plus, LLC

 

 

 

 

 

DOWNLOAD "Making the IRS Work In Your Favor" (PDF)

Questions? Contact Mark W. Sullivan, EA

 

 

 

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