Tax classification for small business

by amrogers3. Posted on Sep 14, 2020    1    12

I am running a one truck transportation business. No employees. I will like to be able to deduct the cost of the truck and pay myself a salary.

What is the best choice: c-corp, s-corp, or pass-through sole proprietorship?

Everything I am reading online is super confusing. Tax law is hard!


ClickityCoder 2

Deductions like that shouldn’t be affected by the business type. The main thing will be deciding if this is your personal truck, reimbursed by the company, or a company truck.

If it’s your personal truck, just track your mileage for business and reimburse yourself the federal standard (this year is $0.575 per mile) or if it’s the company truck you’ll need to sign the truck, insurance, etc to the business and then I’d recommend getting a different car for personal reasons.

To answer your question again, the business type doesn’t matter so just find an accountant and ask them how to do this as a sole proprietorship.

  amrogers3 1

Thanks Coder.

It's a transportation diesel truck if that makes a difference.

I read the sole-proprietorship (SP) gets taxed between 10%-37% (I guess the percentage depends on your tax bracket) and the c-corp get taxed at 21% and there is no FICA tax on profits.

I think I should be in the 24% tax bracket with me and my wife's combined income.

Would c-corp make more sense to avoid FICA and pay 21% instead of my 24% tax bracket? Also, it is my understanding SPs get taxed even on money that is in the business account at the end of the year.

Dmurphy2016 1

When you say diesel transportation truck are you saying a box truck? A semi truck? That will make a difference. If it’s over a certain weight or class you won’t be able to deduct Mileage

ronnevee 1

Even with a corporation, you have to take a salary, and that salary is taxed higher then a sole proprietorship. Especially with the 4.8% qbi savings.

A corporation or a sole proprietorship both pay taxes on profits, even if it stays in the business account.

I highly doubt a C Corp is a good call here. Perhaps an S Corp election though, would be.

  amrogers3 1

Going down the rabbit hole of small business taxation....

Interesting point on the s-corp option.

I read more on the s-corp. You said the c-corp is taxed higher than a sole-proprietorship. However, for the S-corp, I read The S corporation (S corp) is a special kind of corporation that passes corporate taxes through to the shareholders. Then, the shareholders report this income on their personal tax returns and pay taxes on their total combined income at personal tax rates.

- wouldn't I pay less if I was taxed at personal tax rates (24%) on the shareholder salary I take from the business?

- also, from what I understand, the salary is considered business tax deduction I can use to reduce taxes on the remaining business profits?

ronnevee 1

I'm saying that any money you take out of a C Corp is salary, and still taxed at your 24% tax rate. Only money that never leaves the Corp is taxed lower at 21%. And then if you take it out, it's double taxed again at your rate. So the C Corp isn't any good to reduce taxes on money you ever take out of the business.

  amrogers3 1

So for example, say my profits were $80K and I take out $40K as a reasonable salary for a truck driver and keep $40K in the business for maintenance, repairs, misc expenses, etc. Would an S-corp be the way to go here so I dont get taxed on the money that never leaves the business?

ronnevee 1

If you hold that money over the end of the year, it will be taxed. With any tax structure, that will be taxed if held over the end of the year.

  amrogers3 1

Interesting. But if I use it to make business purchases before the end of the year, I wont get taxed on it, correct?

For the money left over, is it taxed at personal tax rates?

ronnevee 1

Correct on the first part. With any entity, business expenses are deducted in the year the purchase 8s made.

With a C Corp profits left over the end of the year are taxed at the corporate rate. (and would again be taxed at the personal rate when taken out in future years)

With a S Corp it would be taxed at your personal rate.

As a sole proprietorship, it would be taxed at your personal rate PLUS self employment taxes.

UncleFishKiller 1

S corp simply transfers tax liability to the shareholders, it doesn't really create any savings. When you file, the profit or loss moves to your personal return and the business pays no taxes directly.

ronnevee 1

The tax savings of a S Corp is no fica taxes on profits above salary.