Transportation Companies: Tax Impacts of Entity Structures

Transportation Companies: Tax Impacts of Entity Structures

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Choosing the right entity structure for your transportation business

One of the most important decisions you make for your transportation business is determining the legal entity structure because it directly impacts taxes and other liabilities. Choosing the right type of entity structure for your transportation business can be a complicated process. There are numerous factors going into making this decision.

It is critical to understand the business structure options available to you, the tax implications of each option and when each is most appropriate for your business. We provided a summary of the most common business structures a transportation business and the tax advantages and disadvantages of each.

Sole Proprietorship

This is one of the most common types of business entity structures. It is also the easiest to form and maintain, and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.

  • Tax Advantages
    • Income and expenses are included on the 1040 so there is no separate form to file.
    • Business losses may offset other income earned on the 1040.
  • Tax Disadvantages
    • You pay both the employee and employer portions of employment taxes on your self-employed income. This is typically 15.3%.
    • It is unincorporated, which means there is no legal separation between you and your business. Since you are personally responsible for your business’ liabilities, your personal assets may be at risk.

Corporation

A corporation receives a certificate of incorporation and is considered legally separate from owners. It is the most complex and expensive entity to create and maintain, but it offers the most protection of all entities.

  • Tax Advantages
    • Owners avoid any personal liability and personal assets are not at risk.
    • Currently, corporations have a flat tax rate of 21%. This tax is paid at the corporate level, with no corporate tax paid by owners.
  • Tax Disadvantages
    • Any earnings distributed to shareholders are taxed at individual tax rates on the shareholder’s individual tax return. This leads to double taxation of the same earnings – once at the corporate level and again at the individual level.

S Corporation

One way to avoid the double taxation of a corporation is to elect to be taxed as an S Corporation.  An S Corporation has several appealing tax benefits and provides business owners with the liability protection of a corporation.

  • Tax Advantages
    • Income and losses are passed through to shareholders and included on their individual tax returns.  There is no tax paid at the corporate level.
    • An S Corporation may be eligible for a qualified business income deduction of up to 20% of qualified business income.
  • Tax Disadvantages
    • Since income is taxed at the individual level, the tax rate may be higher than the flat corporate tax rate of 21%.
    • S Corporation shareholders must be paid reasonable wages, which generally means wages are comparable to what would be paid to someone else to do the same job. This results in additional taxable income to the individual, plus an additional expense in the form of wages and payroll taxes for the corporation.

Limited Liability Company (LLC)

An LLC is a popular entity structure for small to medium-sized transportation businesses. It is a form of a partnership allowing owners to limit personal liabilities. LLCs were created to provide business owners with the liability protection that corporations benefit from, without the burden of double taxation.

  • Tax Advantages
    • Income and losses are passed through to the partners and included on their individual tax returns. There is no tax paid at the entity level.
    • An LLC may be eligible for a qualified business income deduction of up to 20% of qualified business income.
  • Tax Disadvantages
    • You pay BOTH the employee and employer portions of employment taxes on your self-employed income. This is typically 15.3%.

Questions?

There are several factors you should consider when selecting an entity structure for your transportation business – liability, tax implications, cost of formation and ongoing administration, flexibility and control. With the recent Tax Reform, taxation has been brought to the forefront in making and rethinking this decision for transportation business owners.

If you are planning to start a new transportation business, you will need to decide what type of entity structure you want. As discussed, there are several advantages and disadvantages to each entity so it is important you do your research and contact a professional with experience. If you are an established transportation business, the Smith Schafer team can analyze your situation, advise you on the advantages and disadvantages of each option and provide a structure analysis.

Partner with an experienced team of cpas to help you create saving opportunities both now and in the future. Contact us today to schedule a consultation about your transportation business.

Retirement & Estate Planning Guide for Transportation Business Owners

Retirement & Estate Planning Guide for Transportation Business Owners

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As a business owner, you have a lot of responsibilities – budgeting, marketing, selling, and countless other tasks. It is easy to put your own financial plans on the back burner for the sake of growing the business. But it is important for you to have a personal financial plan and to ensure it takes into account the unique considerations and opportunities of owning a business. Below are seven basic tips to start creating your personal financial plan:

1. Save for your own retirement.

The right retirement plan allows you to maximize your retirement savings, while also benefiting your transportation company and employees.

  • Example: You could implement a safe harbor 401(k) plan for your transportation company. This type of plan requires the company to contribute to employees’ savings accounts.  These contributions by the company are completely tax deductible. In addition, a safe harbor 401(k) plan automatically passes annual compliance testing, which will allow you as an owner to maximize your contributions to the plan.

A retirement plan only helps your retirement savings IF you choose to contribute to it. We recommend you maximize your contributions, or at least contribute enough to maximize your company’s matching funds. If you have a 401(k) plan, you can contribute up to $19,000 to it in 2019 (plus another $6,000 if you are over 50). 

2. Create key estate planning documents.

The first step to estate planning is to start with the documents:

  • Will
  • Power of attorney
  • Healthcare directive

Ensure these documents address what happens to your transportation business in the case of your death or disability. Well-executed estate planning documents ensure someone you trust inherits the business or manages business transactions on your behalf.

3. Purchase life and disability insurance.

As a business owner, you should have life and disability insurance policies naming the business as a beneficiary. This will guarantee an income stream to help keep the business operating in your absence.

4. Have a buy-sell agreement.

If your transportation business has multiple owners, you should have a buy-sell agreement in place. Buy-sell agreements specify who can buy an owner’s shares of the business, under what conditions, and at what price. Having this agreement in place now may reduce conflict and potential costs when a business owner exits the business.

5. Create a succession plan.

After completing basic estate planning documents, we recommend creating a succession plan. This lays out, in detail, how the business will prepare for a transition in ownership. If your succession plan includes transferring the business to a family member or key employee, it could be beneficial to start that transfer now.

In 2019, you are allowed to gift up to $15,000 to an individual without incurring a gift tax liability.  If you and your spouse own the business, each of you can gift $15,000. Likewise, if you are transferring the business to an individual and his or her spouse, you can gift each of them $15,000.  Transferring your transportation business this way allows you to transfer a significant portion of your business without any gift or estate tax liabilities.

6. Discuss your plans.

Once you have an estate or succession plan in place, make sure you discuss them with all parties affected. These may be hard conversations, but they are imperative to ensure everyone knows what is at stake. This can help avoid conflict and disappointment later.

7. Review and update your plans regularly.

Finally, you should review your plans regularly and update them as necessary. You may have a new family member or a key employee leave your organization. These things can drastically change your retirement, estate or succession plans. In addition, tax laws are constantly changing, so something that is tax advantageous in one year may not be in a different year. It is important your plan is always up-to-date to reflect your wishes.

Need Help?

Your future can be more secure with the help of a Smith Schafer advisor. We can help you determine the appropriate immediate and long-term retirement and estate planning strategies. The sooner you start planning, the better. We can help with:

  • Review Wills, Trusts & Retirement Plans
  • Asset Restructure
  • Estimate Estate Taxes
  • Identify Tax Savings
  • Succession Planning
  • Valuations
  • Gifting
  • Wealth Management

Qualified Charitable Distribution – What You Need to Know

Qualified Charitable Distribution – What You Need to Know

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If you are age 70 ½ or older, IRS rules require you to take a required minimum distribution each year from your tax-deferred retirement accounts. This additional taxable income may push you into a higher tax bracket and reduce your eligibility for certain tax credits and deductions. To eliminate or reduce the impact of required minimum distribution income, you may want to consider making a qualified charitable distribution.

A qualified charitable distribution is a direct transfer of funds from your IRA to a qualified charity. Amounts distributed as a qualified charitable distribution may be counted toward satisfying your required minimum distribution for the year and be excluded from your taxable income.

An eligible qualified charitable distribution must meet the following conditions:

  • Be at least 70 ½
  • The funds must come out of your IRA by your required minimum distribution deadline – typically December 31
  • Funds must be transferred directly from your IRA to one or more qualified charities
  • Qualified charitable distributions are limited to the amount that would otherwise be taxed as ordinary income
  • The maximum annual distribution amount qualifying a qualified charitable distribution is $100,000. However, if you are a joint tax filer, both you and your spouse may make a $100,000 qualified charitable distribution from your own IRAs.

Qualified Charitable Distributions & Required Minimum Distributions

You are allowed to make a qualified charitable distribution in excess of your required minimum distribution amount, up to $100,000. However, any amount donated above your required minimum distribution does not count toward satisfying a future year’s required minimum distribution. If your qualified charitable distribution does not fulfill your required minimum distribution for the year, you will need to withdraw additional funds to satisfy your required minimum distribution.

Example: You take a required minimum distribution in February, and then in November decide you want to do a qualified charitable distribution. You cannot retroactively deem the February distribution to be a qualified charitable distribution. You may still make the qualified charitable distribution and exclude this distribution from taxable income, but you will still need to include the February distribution as income.

If you take a regular withdrawal from an IRA and use it to make a charitable contribution, you still need to include this required minimum distribution in your taxable income. In order to meet the requirements of a qualified charitable distribution, it must be made directly to the charitable organization. A distribution in the form of a check must be made payable to the organization.

Qualified Charitable Distributions & Charities

For purposes of making a qualified charitable distribution, a eligible charity is any 501(c)(3) organization. This DOES NOT include private foundations or donor-advised funds. You are not allowed to receive any benefit in return for your qualified charitable distribution.

Example: If your donation covers tickets to a gala, your gift would not qualify as a qualified charitable distribution.

The charitable organization must cash your check before year-end for the qualified charitable distribution to satisfy your required minimum distribution. If you are planning to use a qualified charitable distribution as part of your year-end giving strategy, ensure you allow plenty of time for the charity to cash the check. Make certain you receive acknowledgement of the donation because you will need this to claim a deduction for a regular charitable contribution.

Qualified Charitable Distributions & Brokerage Accounts

Brokerage firms process each qualified charitable distributions differently. Contact your broker to learn exactly how to make a qualified charitable distribution from your account. The default option on many IRA distributions is to have tax withheld since most distributions are considered taxable income. If you are making a qualified charitable distribution, confirm with your broker you are not automatically having tax withheld, because the distribution is not taxable.

Questions?

Create a strategy. Gain value beyond the next tax return. 

Free Download: Bookkeeping Class Presentation

Free Download: Bookkeeping Class Presentation

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We teamed up with CEDA to offer a free bookkeeping class to local businesses on August 6, 2019! Smith Schafer Principal, Trisha White, discussed:

  1. Why bookkeeping is important
  2. Choosing software
  3. Basics of hiring employees
  4. Budgeting and why it’s important
  5. Accounting methods (cash vs accrual)

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FREE Presentation Download: Understanding Revenue Recognition & Leases

FREE Presentation Download: Understanding Revenue Recognition & Leases

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Do you understand the impact of the new accounting standard on your business? Revenue recognition has been around since 2010, when the first draft of the new standard was released. Three exposure drafts and numerous accounting standards later, it will be required to recognize income under the five-step approach.


We hosted a free breakfast seminar event at the Golden Valley Country Club on July 30 and attendees learned…

1. GAINED A BETTER UNDERSTANDING.

The new revenue accounting standards requires a consistent, single model for recognizing revenue and disclosure requirements on financial statements. This new standard was effective January 1, 2019 for all industries.

2. HOW TO PLAN FOR CHANGES.

In 2020, nearly all leases will need to be disclosed on the balance sheet. This may have a major affect on business banking relationships and access to new capital.

3. RECEIVED GUIDANCE ON THE IMPACTS.

At this educational seminar, we provided attendees with awareness and advice on these key issues and how they may impact business decisions.

Don’t miss out on our upcoming events – click to see what’s next!

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Minnesota Wage Theft and Employer Record Keeping Law

Minnesota Wage Theft and Employer Record Keeping Law

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On May 30th, Minnesota enacted a new Wage Theft Law amending existing state labor laws adding significant recordkeeping and notice requirements for all Minnesota employers. The new law is effective today, July 1, 2019 with penalty enforcement effective as early as August 1, 2019. This means additional recordkeeping and changes to employer paystubs are required starting July 1, 2019.

Wage Theft

The law will make it a crime to commit wage theft, which could be any of the following actions by an employer with intent to defraud:

  • Failing to pay an employee all wages, salary, gratuities, earnings, or commissions
  • Require an employee to provide a wage receipt greater than the wages actually paid
  • Demand an employee a refund or rebate from wages owed to the employer
  • Making it appear that the wages paid were greater than the amount actually paid

The law allows for fines of up to $100,000 and 20 years in prison, if convicted.

Recordkeeping and Additional Wage Statements Requirement

Earnings Statements (Paystubs) Include New Information

The law adds additional requirements to an employee earnings statement. Paystubs will now be required to include these additional items:

  • Employee’s rate or rates of pay and basis thereof, including whether the employee is paid by the hour, shift, day, week, salary, piece, commission or other method.
  • Allowances, if any, claimed for permitted meals and lodging.
  • Employer’s telephone contact.
  • Physical address of employer’s main office or principal place of business and a mailing address, if different.

Signed Wage Statement for Each Employee

Previous to this enactment there was not a requirement to have a signed wage statement. The law creates a new wage statement which requires employers to provide a new employee with written notice of certain items at the start of employment:

  • Employee’s employment status and whether an employee is exempt from minimum wage, overtime and other state wage and hour laws, and on what basis. 
  • Number of days in the employee’s pay period and the regularly scheduled payday. 
  • Date the employee will receive the first payment of wages. 
  • Employee’s rate or rates of pay and the basis thereof, including whether the employee is paid by the hour, shift, day, week, salary, piece, commission or other method and the specific application of any additional rates. 
  • Allowances, if any, that may be claimed for permitted meals and lodging. 
  • Provision of paid vacation, sick time or other paid time off (PTO), how the paid time off will accrue and terms for its use. 
  • A list of deductions that may be made from the employee’s pay. 
  • Employer’s legal name and the operating name, if different. 
  • Physical address of employer’s main office or principal place of business and a mailing address, if different. 
  • Employer’s telephone number. 

This notice must be signed by the employee and kept by the employer.  

Written Notice Required When a Change is Made

The law requires an employer to provide written notice to an employee whenever changes are made to the original written notice. Including a change of pay rate, change of PTO and other payroll and benefit changes.

Wage Statements for Existing Employees

The law does not require employers to provide and obtain signed wage statements from existing employees. However, the Department of Labor strongly encourages employers to provide the written notice with the information required under the new law to all employees when the law takes effect. Employers are required to provide written notice to all employees when changes are made to items included in the wage statement. 

Employers Keep Additional Records

The law requires employers to keep additional employment records for a minimum of three years. The new requirements include:

  • Each employee’s hours worked each day and week, including, for all employees paid at piece rate, the number of pieces completed at each piece rate.
  • A list of personnel policies with brief descriptions of each policy that were provided to each employee, including the date the policies were given.
  • A signed copy of the new wage statement which must include the items noted above.

Other Provisions

The law also includes additional provisions (not discussed in detail here) related to timing of payments to employees for wages, salary, gratuities and commissions. Restrictions on retaliation against employees for asserting their rights as well as broadened enforcement authority for the Attorney General.

For additional information on the wage theft legislation seek legal counsel or the Minnesota Department of Labor and Industry website. The website has employer guides, sample notices and FAQ’s related to the law changes.