Can I drive Uber as S Corp owner?

[Bryan46]

I was thinking to form a S corp and drive Uber under the business. Can I pay myself a salary and treat rest of the profit from Uber as distribution?

Thanks, 

[tagteam]

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@Bryan46 wrote:

Can I pay myself a salary and treat rest of the profit from Uber as distribution?

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As an employee of your S corporation, you must pay yourself a reasonable salary.

See https://www.irs.gov/pub/irs-news/fs-08-25.pdf

[Opus 17]

From what I have heard, there is not likely to be much left after your salary, uber supposedly pays pretty poorly.

Yes, I think you can do that in principle. It might be cheaper to be a sole prop taxed as an S-corp rather than actually forming an S-corp, depending on your state and the fees involved. However:

A. You have to pay yourself a fair market wage, what drivers usually get paid, which might be more than minimum wage, depending on your state labor laws and the local economy.

B. An S-corp (formally or taxed as) prevents you from deducting operating losses against your other income. For example, if you bought a fancy new car and took depreciation rather than standard mileage, your expenses might give you a tax loss that you could deduct against other income, even though you have positive cash flow.  You can't do that as an S-corp.

I read a tax court case once involving a man who had a small business, and one day his son formed him into an s-corp because he got some incomplete advice on the pros and cons.  It turned out to be very bad for the man so he filed on schedule C instead.  He got audited, fined, took it to court, and lost.  The court said that even if he didn't understand what his son had done, he signed the papers and now he was stuck with the results.  Make sure you know what you are doing. 

[Bryan46]

Hi,

Thanks for your response. To be clear, why you cannot take car depreciation and take mileage deduction? Is there any publication explain this? Just out of curiosity.

Thank you,

[VolvoGirl]

The depreciation includes mileage.  You can't get both.  

How to depreciate property

Publication 946 (2021), How To Depreciate Property | Internal Revenue Service

IRS overview of Depreciation

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/A-Brief-Overview-of-Depreciation

[Opus 17]

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@Bryan46 wrote:

Hi,

Thanks for your response. To be clear, why you cannot take car depreciation and take mileage deduction? Is there any publication explain this? Just out of curiosity.

Thank you,

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Business use of a vehicle is explained in chapter 4 of IRS publication 463. 

https://www.irs.gov/forms-pubs/about-publication-463

Basically, the IRS standard mileage rate makes allowance for all vehicle expenses, including fuel, maintenance, repairs, insurance and depreciation.  You can't take the standard mileage rate and also depreciation, because you would be taking depreciation twice.  

If you use the actual expense method, you must track all your vehicle expenses for the year and claim the percentage of total expenses equal to the percentage of business miles you drive in a year.   Because the actual expense method allows you to deduct depreciation and interest on a car loan (but not the principal part of the payment), the actual expense method may be more lucrative if you drive a newer, more expensive car.  For most people, the standard mileage rate is better.  In addition to being less paperwork, you get extra depreciation if you  drive a car that is more than 5 years old.  After 5 years a car is fully depreciated and you can't claim depreciation as an expense if you use the actual expense method.  But if you use the standard mileage method, you can continue to claim the full IRS rate, even though it contains a depreciation allowance that you would not normally be entitled to.  You basically get to deduct more deprecation than the car's actual cost if you drive it long enough using the standard mileage rate. 

Also, if you ever want to use the standard mileage rate for a particular vehicle, you must use it the first year you place the car in service in your business.  In following years you can use either the standard mileage rate or the actual expense method.  If you use the actual expense method in the first year, you must always use the actual expense method for that car. 

[Bryan46]

Thank you! Now I understand

[Bryan46]

Thank you Sir. 

[Mike9241]

@Opus 17 B. An S-corp (formally or taxed as) prevents you from deducting operating losses against your other income. For example, if you bought a fancy new car and took depreciation rather than standard mileage, your expenses might give you a tax loss that you could deduct against other income, even though you have positive cash flow. You can't do that as an S-corp

to take an S-Corp loss you need tax basis and material participation.  then the loss goes against other income.  just tried an example with Turbotax desktop. single, standard deduction, material participation, $50,000 salary from S Corp and $20,000 S Corp loss. result AGI $30,000, taxable income $17,450

[Opus 17]

Here's another issue with the S-corp idea.  If you use a personally owned car, the S-corp can reimburse you tax-free for your expenses (actual method or standard method) before paying your salary.  That's the same deduction you would get if you were a sole proprietor.  But if the S-corp owns the car, and if you drive it for personal (non-business) reasons, the company has to include the value of personal use of a company car as part of your taxable W-2 wages. 

[Opus 17]

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@Mike9241 wrote:

to take an S-Corp loss you need tax basis and material participation.  then the loss goes against other income.  just tried an example with Turbotax desktop. single, standard deduction, material participation, $50,000 salary from S Corp and $20,000 S Corp loss. result AGI $30,000, taxable income $17,450

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Hmm.  I may be incorrect on that point.  Although I know that in the tax court case I read, the small businessperson (defendant) was denied a lot of deductions because he had formed an S-corp instead of filing as a sole prop and it really hurt him but he was stuck with it (for those tax years.)  Professional advice would be warranted.

[Bryan46]

In this scenario, if the car is under me and later S corp reimburse me for the mileage. How do I claim this reimbursement on the business return? As an operation expense? 

[tagteam]

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@Opus 17 wrote:

......It might be cheaper to be a sole prop taxed as an S-corp rather than actually forming an S-corp

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Sole proprietors cannot make that election.

Only eligible entities (e.g., an LLC) can elect to be treated as S corporations for federal income tax purposes. 

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@Opus 17 wrote:

An S-corp (formally or taxed as) prevents you from deducting operating losses against your other income....

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Where did you read that? It is simply not true unless the shareholder is a passive investor or the net loss exceeds the shareholder's basis (neither would seem to be the case here).

[Mike9241]

as the driver performing all the services for the S-corp, I would think that from an IRS standpoint you would have to take a substantial salary leaving little remaining profits. even those profits are subject to income taxes but you do avoid the social security and Medicare taxes.

some states impose an income tax at the S-Corp level. as an employee some states would require the corp to carry worker's compensation insurance.   in one state the failure to carry workers’ compensation insurance is a criminal misdemeanor, punishable by a personal fine of up to $10,000 or one year in jail, or both. For second offenses it goes to $50,000.

the standard mileage rate includes an amount for depreciation. that's why it's actual expenses or standard mileage. 

about the best IRS info on this is PUB 463 chapter 4

https://www.irs.gov/forms-pubs/about-publication-463 

[Opus 17]

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@Bryan46 wrote:

In this scenario, if the car is under me and later S corp reimburse me for the mileage. How do I claim this reimbursement on the business return? As an operation expense? 

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If you are a sole proprietor, you are a disregarded entity.  You file a schedule C attached to your regular (personal) tax return.  The schedule C lists your business income and expenses.  The net income flows to your regular 1040 where it is combined with any other income, such as from a spouse, or a W-2 job, or investments, and so on.  Then your personal deductions are applied (mortgage, charity, etc.) and any credits (for dependents, purchase of an EV or energy efficient home improvements, and so on). You pay income tax on your net taxable income, and you pay self-employment tax on the income from your schedule C business.

If you use your own car for business, then your car expenses are one of your expenses on schedule C that are subtracted from your gross income.  You would determine your car expenses using either the standard mileage method or the actual expense method.  I don't know what other expenses you would have as a rideshare driver, but you would deduct them as well.  (If you get a cell phone for ride share only, you can deduct the cost of the phone and the bill.  If you use your personal phone, you may be able to deduct a portion of the cost if you have a reasonable method of allocating the total cost between personal and business use.  You can't deduct your own meals on the road, but if you provide snacks for passengers, I believe you can deduct 50% of the cost.  You can also deduct Kleenex, hand sanitizer and other amenities, provided you have records to show they are business expenses.)

If you did this as an S-corp, you keep the same mileage and car expense records.  The S-corp can reimburse you under an accountable plan and then the S-corp deducts the reimbursement as a business expense on its form 1120 business tax return.  The S-corp can pay directly for snacks and amenities, and can deduct the cost of amenities and (I think 50% of the cost of the snacks) as business expenses on its business return.  

In simpler terms, if you are self-employed, you can deduct the exact same expenses as an S-corp is allowed to deduct.  The only advantage to being an S-corp is that you pay less employment tax, if you have profits that are more than the salary you must pay yourself as fair compensation for the work you perform.    But that "fair compensation" question is the #1 audit target for single owner S-corps, so be careful.    There may be other drawbacks as well, and I would recommend professional advice.