CREDIT SCORES. If you didn’t know, the NTA is a great organization to join to build and/or improve your credit score. To my knowledge, the NTA is the ONLY association that transmits your 30-60-90 account aging rating to a credit company especially for truckers. Your FICO scores (the Fair Isaac Corporation credit-scoring system) are used by lenders to determine your credit worthiness. The lower your scores, the more risk you pose to lenders, resulting in higher interest rates or loan denial. Scores fluctuate for many reasons, including your debt-to-income ratio, making minimum payments only, credit inquires and other factors. But nothing impacts credit scores like a missed payment or revolving credit payment. And, for the best-scoring consumers, that drop in your credit score is the most punishing.
Making timely payments is one of the easiest things you can do to show you’re using credit responsibly, which is why your payment history accounts for the largest part of your FICO score – 35%. Late payments remain on your credit report for seven years from the original delinquency date, regardless if the payment is made and the account is current, or if the account is closed and the payment is never received, according to Experian, a global leader in consumer and business credit reporting and marketing services.
The more recent the late payment, the more it can impact your scores. If you’re late or missed a payment, make the account current as quickly as possible. The length of time it takes to recover will depend on whether the late payment is an anomaly or part of a habitual pattern. Establish a current history of on-time payments. Use at least one credit card, paying in full each month to avoid finance charges. On-time payments will add positive activity to offset negatives from the past and, over time, your credit scores will rebound.
TAX RATES & CORPORATIONS. When choosing how to organize your business, consider the tax rates of each option. You can operate under one of four available options: (1) a corporation that has not elected to have any special tax treatment – also called a “C” corporation; (2) a Subchapter S corporation – also called an “S” corporation – that has opted for special treatment under the Internal Revenue Code; (3) a partnership or Limited Liability Company; or (4) a sole proprietorship. Depending on what you chose, your tax rates may be different.
A “C” corporation has tax brackets that are different from those of its owners. For the first $50,000 of taxable income, the federal tax is just 15%. The second bracket of $50,000 to $75,000 calls for a mere 25% rate. From $75,000 to $100,000 the rate is 34%, and above $100,000, an additional 5% tax applies. For $10,000,000 or more the tax rate is 35%. Now you can see why so many companies create a C corporation. The tax rate on a “C” corporation’s first bracket of taxable income has historically always been lower than an individual’s top rate (typically around 50% lower).
Whenever there’s a difference in tax rates between business entities and an individual, a tax planning opportunity exists to shift the tax consequence to the taxpayer in the lower tax bracket. The IRS is very aware of this tax planning idea but, surprisingly, many business owners are not. In fact, there are about 276 business deductions allowed by law that most companies don’t realize.
If you think lowering your tax liabilities is sinister or even unethical, consider this: in 1935 there was a case (Gregory v Helvering) that the Judge said, “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands.”
Because a “C” corporation pays less taxes on the first $75,000 of annual retained earnings than an individual (or “S” corporation, partnership, or proprietorship), a “C” corporation can be useful in growing businesses. On the other hand, when there is no need to accumulate capital, it’s often preferable to avoid “C” corporation status. The reason for this is that an after-tax distribution from the “C” corporation to you is taxed to you on your individual return. Unless that money can be taken out in the form of a deductible expenditure to the corporation, this second tax will have to be paid without an offsetting deduction. This “double taxation” is a major argument against the “C” corporation status.
Let’s look at how three tax concepts (rates, treatment and timing) work together. Assume your “C” corporation has a net profit of $50,000 at year end. If you retain that profit in the corporation, the corporation pays $7,500 in tax. If instead, you pay yourself a bonus of $50,000, the corporation has no taxable income because salaries are deductible. However, when you receive the bonus, you have another $50,000 in taxable income and will pay about $15,000 in tax.
On the other hand, if the corporation pays its net profit of $50,000 to its qualified retirement plan, it gets a deduction, has no taxable income, and therefore pays no tax. Since you have not received the income, you don’t pay any taxes on it, either. Therefore, you have deferred the income tax until you receive your retirement benefit. This is a simple example of the tax planning you can do.
The form of corporation organization selected for your business should be evaluated periodically in regard to your business’s capital accumulation needs, current tax law and your anticipated exit date. Since your personal taxes are calculated from January 1 through December 31, I suggest that you choose a July 1 through June 30 tax year for your corporation. This will enable you to review everything every six months. It’s not easy to be the boss, but it sure has its benefits! If you have questions about your credit scores or how to best set-up your business operation, please do not hesitate to call me at (562) 279-0557 or visit www.ntassoc.com for more information.