Business Loan Deduction

[Firefly]

One of my friends has a long haul truck, he has two drivers so the truck is on the road all the time. He took out $60,000 SBA loan 2 years ago to buy the truck and was telling me he deducts the loan payment on his taxes.

My understanding of the taxes is that you can deduct the interest and depreciate the truck but I have never heard of anyone deducting the actual loan payment. I went to the IRS website and couldn't find anything that tells me the loan payment is deductible. So I guess my question is really is this allowed? if yes I would appreciate a link.
Thank you guys in advance.

[kittypuppymom]

He must be mistaken. He can deduct the interest and the depreciation and the taxes on the truck. All the expenses associated with said truck ie.., gas or mileage, repairs and such. Surely he has a tax professional doing his return at least I hope he does.

[Firefly]

Kitty that was my assumption as well that he is mistaken but his insistence made me think about and I have been looking for an answer ever since. His tax profession is not really a tax professional because it's one of those shops that pops up on tax season after taking few weeks of tax prep courses and they mostly rely on the software.

[taxref]

Your understanding of the tax treatment (ie: depreciate the asset and expense interest paid) is correct. Payment of the principal on a loan is not deductible, just as he did not have to report the loan itself as income.

Its very possible that his tax return contains material errors. Which way the errors went also depends on what was done with depreciation claimed and/or any 179 expensing done the first year.

He should have his tax return looked over by a professional to see if a 1040X is in order.

[mwcpa]

to add to the ref....

not just someone who claims to be a professional, but one that has the credentials to back it up.... an EA, a CPA, an unenrolled preparer that took the IRS exam to obtain a PTIN.... not some guy who has a storefront "just during the tax season" and also runs a dry cleaner, notary public, insurance sales and other businesses out of the space....

[Firefly]

Thank you guys for the response. I just found out my friend is getting audited not for the loan payment deduction but apparently he didn't have a separate business acct for all his expenses and now have to substantiate all of his business expenses. He used the general millage deduction in 2010 and this year he was talked into claiming part of his house as an office expense and a lot of other stuff and ended up with a loss and a huge refund. My question if the return was accepted and they sent him the check why would he get audited now? Or is this something the IRS normally does?

[mwcpa]

"if the return was accepted and they sent him the check why would he get audited now"
the tax system we have in the US is one of self-assessment and the presumption that one is honest in the disclosures made and positions taken.

the IRS (and other taxing agencies) have the right, within the law, to check (this is an "audit") what one claims is their taxable income within certain periods of time after the return is filed.

if one has proper substatiation for positions taken (a spearate bank account is not needed for a sole propertor, but a proper set of books and records is required).

"is this something the IRS normally does"
yes

"general millage deduction in 2010"
I assume you mean "mileage"... as long as he/she can support the business miles deducted this should not be an issue.

"he was talked into claiming part of his house as an office expense"
if one has a true home office and properly discloses it on a 8829 form, then this should not be an issue... but a home office cannot "create" a tax loss.... more than likely the home office was not an allowed expenses (certain expenses may be allowed if the home is owned, such as real estate taxes and mortgage interest). (I have seen often when supposed tax preparers show home office as "rent" on the schedule C form to try to cheat the system....)

[rangerj]

Does the "standard mileage rate" apply to a truck (semi tractor and trailer). All of the code and other references refer to a car or automobile. In fact vehicles, including automobiles (e.g. taxi cabs) used "for hire" are excluded from using the standard mileage rate.

[mwcpa]

ranger....
"Beginning in 2011, a taxpayer may use the business standard mileage rate for vehicles used for hire, such as taxicabs. " from IR-2010-119, Dec. 3, 2010

and a "semi tractor and trailer" I believe are not a "car".... so the mileage rate probably does not apply.....that is an industry I have little or no experience in.....

[taxref]

I used to have quite a few owner/operators for clients, and unless there has been a recent change they must use actual expenses. All the OTR tractors I have ever seen have a much higher actual expense amount than the standard mileage rate (which is for cars and light trucks). Assuming he can prove his expenses, that should result in a favorable adjustment for that category of the audit.

The home office is iffy, and will be disallowed if the regular and exclusive test isn't met. Owner/operators do need a place to do paperwork and that is often at home, but the exclusive use part of the test is usually failed.

As noted above, if he is a sole proprietor he will have no problems simply because he did not have a business checking account. That makes paperwork more difficult, but having a business account not a requirement. If he is incorporated, however, that could result in major problems.