Tax Tips – July 2019
Should I incorporate?
Q: I am an over-the-road trucker operating as an independent sole proprietor and thinking about becoming a corporation or an LLC. Is that a good idea?
A: There are multiple reasons why one may consider incorporating their business. One is to save on income taxes and another is to protect your assets. Your earnings must be high enough to cover the increased operational costs of being incorporated while also insuring tax savings. You should consult with your attorney regarding the asset protection issue, and ask them about becoming a sole proprietor limited liability corporation for liability purposes. The LLC may be cheaper to operate than an S or C corporation.
Q: How can incorporating save me money on my taxes?
A: There are two types of corporations, a C corporation and an S corporation. Tax savings can be possible with either one. With an S corporation, the owner of a business can take money out in two ways. The first is in the form of a salary. The second is a distribution, which can result in tax benefits.
Q: Since all the income of the S corporation is taxable to the owner-employee, how much of it must be taken as salary versus distribution?
A: The salary that you are taking must be reasonable compensation for the services that you provide. Beware: if you decide on an unreasonably low salary and a high distribution from your company, the IRS can terminate the S corporation, and impose taxes at both the corporate and shareholder level with penalties. Remember, the determination of a reasonable salary is complicated but important. Have your tax adviser help you. The new tax law effective Jan. 1, 2018, may allow a 20% deduction on adjusted ordinary business income on the federal return of a pass-through entity, which is an S corporation or a LLC not a C corporation.
Q: So how do I achieve tax savings?
A: The tax savings that one may realize by incorporating and subsequently becoming an S corporation is achieved through proper tax planning. If you choose to become a C corporation as opposed to an S corporation, there are benefits to the C corporation that the S corporation does not have. Those benefits are in the area of “employee benefits,” such as medical reimbursement plans, medical insurance, disability and long-term care insurance. A C corporation has a flat tax of 21%, however.
Q: What are the key differences between an S corporation and a C corporation?
A: Taxation and corporate ownership. C corporations are separately taxable entities and file a corporate tax return, reporting profits or losses. The S corporation shareholders pay personal income tax on earnings not distributed, salary or dividend. S corporations are pass-through entities, so there is no tax paid normally at the federal corporate level. It is paid at the individual level.
Q: What about an LLC?
A: Operating under your own LLC is another alternative way to operate. As an LLC, you can operate as a sole proprietor. Everything you do from opening up your bank account, to the debit or credit cards, and purchasing your truck, is done in the LLC name. Even reporting the business on your personal tax return is done under the LLC name. With this status, the LLC’s income is not taxed at the entity level. The LLC typically completes a partnership return if the LLC has more than one owner. The LLC alternatively can request from the IRS to be taxed as a corporation. You can have your LLC taxed as an S corporation (Form 2553) or as a C corporation (Form 8832). LL
This article has been presented by PBS Tax and Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter century. If you would like further information, please contact us at 800-697-5153. Visit our website at PBSTax.com.
Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.