When doing a trucking downtime calculation claim, depreciation is a non-cash expense—a tax tool. Depreciation is not a variable operating expense. Depreciation should not be deducted when determining a trucking business’s actual lost income due to a downtime claim.
When commercial equipment is damaged and taken out of service, its owner continues to incur certain tax-deductible expenses, including depreciation. Even though no cash leaves the owner’s business when depreciation is recorded, it represents the loss of value equipment experiences over time, even when sitting and not generating revenue.
The Core Principle
Loss of use damage calculations must:
- Compensate the trucking business for what it would have earned.
- Deduct only expenses that were not incurred because the equipment was down.
- Avoid penalizing lawful tax practices.
Here’s a quick example related to the depreciation of a semi-truck after an accident:
*A trucking company purchased a truck (financed or outright) and is using it in its operations.
*The truck is hit. During the downtime period, the truck cannot produce revenue.
*Depreciation continues to accrue. Depreciation is an elective tax treatment similar to other fixed expenses (loan payments, insurance costs, etc).
*Whether operating or not, depreciation is recorded for that truck on the tax return, calculating the economic life of the truck.
Misinterpretation of the Law and Accounting Principles
When a trucking business suffers from one of its trucks being out of service due to another party’s negligence, the law across the vast majority of the United States entitles that business to recover loss of use (downtime) damages. The purpose of the law is simple: Place the trucking company in the same financial position it would have been in had the truck remained operational.
A common misinterpretation of accounting principles occurs when insurance adjusters suggest deducting tax-allowed depreciation from gross income to calculate claimants’ downtime losses. This approach is both economically and legally flawed. Depreciation methods vary depending on the expected life of an asset and other factors. Some equipment could be fully depreciated in one year, while other equipment could be depreciated over 10 years at 10% per year.
The Purpose of a Downtime Calculation
Loss of use for the downtime of a vehicle is intended to compensate for net lost profit. The basic calculation is as follows:
Gross revenue that would have been earned
-Variable expenses that would have been incurred
= Lost profit
Determining which expenses are variable vs fixed is vital to a proper calculation. Variable expenses are costs that fluctuate with the operation of commercial equipment. If equipment isn’t running, variable expenses are not incurred. Therefore, they are deducted from the above calculation.
Common examples of variable expenses include:
*Fuel
*Tolls
*Lumper fees
*Driver pay (if not paid during downtime)
*Maintenance directly tied to miles driven
Fuel and toll costs are avoided when a truck is down. Wear-and-tear maintenance tied to mileage is avoided. But depreciation is not.
Depreciation Is Not a Variable Expense. It is a Non-Cash Item for Accounting and Tax Purposes
Depreciation does not belong in the above variable expense category. Depreciation is simply a mechanism used in tax accounting. It is a legal method to allocate the cost of equipment over time vs allocating all at once (cash basis vs tax basis).
Note:
*A truck sitting in a repair yard still depreciates.
*A truck operating normally still depreciates.
*Depreciation doesn’t change based on whether the truck drives 10,000 miles or zero miles in a given month.
*Depreciation doesn’t require a cash outlay during the downtime period
*Depreciation isn’t avoided because the truck is out of service or tied to miles driven
Tax Strategies
Owner-operators and fleet owners alike have the lawful right and the duty to minimize tax liability. In fact, to encourage capital investment in equipment, our legislature created depreciation schedules and mechanisms for accelerated depreciation. Consideration was made for capital loss at sale vs periodic allowance for tax purposes.
To suggest penalizing a trucking business in a loss calculation because it followed federal tax law would be to effectively punish lawful tax compliance.
Example:
Let’s say a truck with 30 days of downtime has monthly taxable depreciation of $3,000. If the adjuster deducts depreciation, the truck owner is now undercompensated by $3,000. Why? Because that $3,000 was not avoided. The truck continued depreciating while in the shop and the truck owner did not save that money. Depreciation is an accounting entry, not an avoided expense.
Why Deducting Depreciation Is Conceptually Incorrect
Loss of use damages are designed to measure lost earning capacity, not taxable income. Taxable income and operating profit are not identical concepts. Depreciation lowers taxable income, doesn’t represent actual cash flow, and doesn’t represent operational savings. It is better to ask: What profit would the truck have produced if it had been on the road?
If a Party Insists that Depreciation Must Be Deducted
- Request they retain a forensic accountant or CPA.
- Ask for a written expert analysis explaining:
Why depreciation is being treated as a variable avoided expense.
How deducting depreciation aligns with standard accounting principles.
Whether depreciation actually ceased during the downtime period.
Fixed costs are not deducted unless they are avoided because only avoided (variable) expenses are removed from projected gross income. Depreciation is not an avoided cost. It is an allowed cost for taxation purposes. If a party believes otherwise, they should hire a qualified CPA defend that position—not rely on unsupported assumptions.
Final Thoughts on Depreciation
Depreciation is fixed and non-cash and continues regardless of operation. It is a tax construct—not an operational expense. Therefore, it should not be deducted when calculating an owner-operator’s downtime loss. A downtime calculation must reflect economic reality. When the law requires at-fault parties to make claimants whole, depreciation does not enter into the loss calculation or determination.
Need Help Recovering Your Downtime Losses?
If your truck was damaged in an accident that wasn’t your fault, and your business has been sidelined, we can help you recover lost income.
Call 1-800-DOWNTIME
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Kelsea Eckert enjoys helping clients resolve their insurance and downtime claims. She is active in the trucking community and is always willing to speak with groups about transportation topics.
Kelsea was raised in the Bloomington, Illinois area and has practiced law since 1988. She lives in Florida and Kentucky, representing clients across the United States.
Over the years, she has written numerous books, including: The Illinois Legal Filing Directory, Small Claims Court Without a Lawyer, How to Form Your Own Corporation, Getting Paid in Full, Lawsuits of the Rich and Famous, and Selling Internationally, Without a Product.
Kelsea regularly speaks at trade shows, podcasts, and radio shows on transportation issues. She writes articles for newsletters, magazines and the Eckert & Associates, PA blog. Some of her writings and interviews are available on Transport Topics, Landline Media, Expediters Online, Service Truck Magazine, and other transportation media networks.
Kelsea attended Illinois State University and University of Georgia during her undergraduate years. She graduated from Southern Illinois University School of Law. She is a member of the Illinois Bar and Florida Bar.
Kelsea is on the board of the Transportation Club of Jacksonville as the Driver Advocate Chair. She is involved in her community through volunteering, and she and her husband have two amazing children.