Tax Tips
Operating entities and per diem

By Howard Abrams, PBS Tax & Bookkeeping

Q. I’m starting my own trucking business. It’s just me with one truck. I hear all kinds of things about corporations and LLCs. I’m very confused about whether I should, as some truckers tell me, incorporate my business.

A. We hear that a lot and it’s not necessarily true. There are three basic types of entity classifications by which to operate your company, as follows:

  • Sole proprietorship
  • LLC (Limited Liability Company)
  • Corporation

By the way, since we are not attorneys, we cannot comment on the legal protection aspect that each entity may or may not provide. Check with an attorney as to whether or not you will be covered if liability protection is your goal.

Q. I really don’t have a lot of assets to protect, but I do plan to check with an attorney just in case. Can you explain the differences between these entities?

A. Yes. The easiest and most cost effective is the sole proprietorship. You can operate under your own name and report the business on your personal income tax return. We suggest you open a separate checking account for the business at your bank and get separate business credit and debit cards. The goal of the record keeping is to produce a profit-and-loss statement to highlight areas that need improvement and to help with income tax preparation.

Q. What about an LLC?

A. We believe that operating as a sole proprietor under your own LLC is the best way to operate. The downside is the initial cost of becoming an LLC, plus any state fees that may be due annually. 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.

And, at some time in the future, you can choose to have your LLC taxed as an S corporation, which may yield some tax savings.

Q. Why wouldn’t I want to just incorporate right away?

A. A corporation is usually more costly to obtain and to maintain. You will need annual corporate minutes and conduct board of director meetings (even with yourself) to approve some corporate activities. And since a corporation is a separate entity, you will need to file a tax return for your corporation thus incurring additional costs.

With an S corporation there are fewer fringe benefits available compared to a C corporation, but we do not recommend a C corporation, which requires more sophisticated bookkeeping.

Q. A new client who is a sole proprietor calls and asks, “Do I qualify for per diem? My 2013 tax return is on extension and I’m filling out your income tax organizer. Other drivers have said I qualify for nights gone. You ask for the number of overnights spent out of town for the year. I don’t know how to compute them. Can you help me?”

A. Yes, generally if you leave on Monday morning and return Friday early evening that’s four nights gone. Can you explain your situation?

Q. I leave very early each day and drive to various cities for 8-12 hours. I’m usually home for dinner. I’m counting the 12-hour day as one day gone. Is that correct?

A. In order to deduct per diem for meals a taxpayer must be away from home long enough that he or she is required to take substantial hours for sleep or rest while gone. Your situation does not qualify you for an overnight. Generally speaking, you should be gone for 24 hours. LL

 

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over 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.