The IRS has recently issued several documents that pertain to longstanding trucking tax issues on which practices differ among companies: deductions for tire costs, and reporting assorted types of payments to employees and independent contractors.
An unnamed taxpayer that has been expensing tires-that is, deducting the full cost in the year of purchase-is the subject of Field Service Advice (FSA) Memorandum FSA 200122002 from the IRS Chief Counsel's office to the field. The company has been buying vehicles without tires, contracting separately with tire makers to have tires placed on the vehicles, and expensing both those tires and all replacement tires. The advice states that the correct treatment depends on the actual useful life of the tires. If the tires have an average useful life of one year or less, they can be expensed. But if the average useful life exceeds one year, both original and replacement tires must be deducted over five years.
Although the document states that it is not binding on the IRS Examination or Appeals divisions and is not to be used or cited as precedent for other cases, it is significant in showing the analysis used by IRS's legal staff. If widely followed by IRS auditors, this advice could be costly for many carriers that expense tires or write them off in less than five years.
The practice of paying workers separately for labor and equipment is the subject of FSA Memorandum FSA 200127004. That document discusses payments by an engineering company to skilled rig welders who were paid for welding tanks and pipes, using their own trucks and welding equipment. The memorandum also reviews two court cases from 2000 in which truck drivers and couriers received separate payments for their labor and their vehicles. In both cases, the drivers were deemed to be employees and the payments for the use of the vehicles were part of their wages, not a separate lease exempt from employment taxes.
Another type of advice from the IRS is an “information letter.” In INFO 2001-0101, the Chief Counsel's staff answered an unnamed writer's request for an explanation of the word “freight” in a regulation that allows an exception from filing form 1099-MISC. That form is used to report payments made in a trade or business, such as payments to independent contractors. However, section 1.6041-3(d) of the IRS regulations provides that the form is not required with respect to payments of bills for “merchandise, telegrams, telephone, freight, storage and similar charges.”
The information letter states, “Payments for transporting goods, whether incidental or integral to a taxpayer's business, are therefore excepted from information reporting. The fact that the payments are made to independent truckers does not change this exception.” These statements are consistent with other advice the Chief Counsel's office has issued occasionally over the last decade. But most carriers and shippers that contract with owner-operators continue to provide 1099-MISCs. Such a step is prudent, but at least it's comforting to know that an inadvertent failure — for instance, to issue a 1099-MISC — will not necessarily result in drastic penalties.
The bottom line: These documents are not as consequential as IRS regulations or revenue rulings, which represent the official, binding IRS position for its agents and taxpayers. However, both FSA memorandums and information letters show the position, and to a degree the reasoning, of members of the Chief Counsel's staff. These individuals are often involved in writing regulations and dealing with court cases. Thus, carriers whose facts are similar to the ones described in these documents should take heed, or comfort, as the case may be.