Tax Tips
Should I incorporate?

By Howard Abrams, PBS Tax & Bookkeeping

I am an over-the-road trucker operating as an independent sole proprietor and thinking about becoming a corporation. Is that a good idea?

There are two major reasons why one should incorporate their business. One is to save on income taxes and the other is to protect your assets. Your earnings must be high enough to cover the increased operational costs of being incorporated while also ensuring tax savings. You should consult with your tax attorney regarding the asset protection issue.

How can incorporating save me money on my taxes?

There are two types of corporations, a C corporation and an S corporation. Tax savings are possible with either one, but we usually suggest the S corporation as best. The owner of a business takes money out of an S corporation in two ways. The first is in the form of a salary, and the second is a distribution, which can result in more tax benefits above the increased cost of being incorporated.

Since all the income of the S corporation is taxable to the owner-employee, how much of it must be taken as salary vs. distribution?

The salary that you are taking must be reasonable compensation for the services that you provide. What do you expect to be paid for all you do? Beware: if you decide on an unreasonably low salary and a high distribution from your company, the IRS can call the distribution a dividend, possibly terminate the S corporation, and impose taxes at both the corporate and shareholder level with penalties. Determining a reasonable salary is complicated but important. Have your tax adviser help you.

So how do I achieve tax savings?

The tax savings that one will 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. However, a C corporation faces the costly issue of possible double taxation.

What are the key differences between an S corporation and a C corporation?

Taxation and corporate ownership. C corps are separately taxable entities and file a corporate tax return, reporting profits or losses. The corporation pays tax on its corporate income. The shareholders pay personal income tax when distribution is made as a salary or dividend. S corporations are pass-through entities so no tax is paid at the corporate level, but is paid at the individual level. Profits and losses are passed through to the shareholders’ individual tax returns. C corporations can have an unlimited number of shareholders, but S corporations are restricted to no more than 100 shareholders.

What about an LLC?

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. The limited liability company offers an alternative to corporations and partnerships by combining the corporate advantage of limited liability protection with the partnership advantage of pass-through taxation. With this status, the LLC’s income is not taxed at the entity level; however, the LLC typically completes a partnership return if the LLC has more than one owner. 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 www.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.