3/11/2011 8:00:00 AM
By Randolph Smith and Barbara Koosa Ryan
Federal Tax Partners
This Opinion piece appears in the March 7 print edition of Transport Topics. Click here to subscribe today.
What was the most important event that occurred in 1958? The creation of NASA? Perhaps the birth of the King of Pop? For privately owned trucking and logistics companies, there is only one answer: tax legislation permitting S corporations.
An S corporation, while providing for the limited liability benefits of a corporation, provides the benefit of pass-through tax treatment. When a transportation company elects S corporation status, items of income, loss, deductions, etc., are passed through to the shareholders and are reported on their income tax returns, resulting in only one level of tax.
Since 1958, Congress has significantly liberalized the S corporation rules. For example, changes in legislation have increased the allowed number of shareholders to 100, broadened the definition of â€œshareholderâ€� to allow members of a family to be treated as one shareholder, broadened types of trusts eligible as shareholders (including the creation of the electing small business trust) and allowed the Internal Revenue Service to treat inadvertent invalid S corporation elections as effective. Eligible S corporation shareholders currently include individuals, estates, certain trusts and certain tax-exempt organizations.
Although S corporation status initially was created for small business corporations, because of the significant benefits and the liberalized regulations, many larger transportation businesses qualify and now take advantage of the benefits of being taxed as an S corporation. For example, Swift Transportation, a $3 billion company, was taken private in 2006 as an S corporation.
The most notable tax advantage of an S corporation is the pass-through tax treatment of tax-related items resulting in only one level of taxation. C corporations pay income tax at the company level, and shareholders also pay tax when profits are distributed as dividends. This is referred to as double taxation. However, S corporations generally are not taxed at the company level. All income is passed through to the shareholders, whether distributed or not, and taxed at the shareholder level.
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