Fringe benefits taxed as wages

[macinta]

Hello,

If I'm running an S-corporation and am the sole employee, is there any benefit to the S-corp providing fringe benefits which get taxed as my wages? I'm currently reading How to Start and Run Your Own Corporation by Peter I. Hupalo and the author claims that it has a substantial advantage, but his explanation seems incorrect to me. I'm wondering whether I am overlooking some important point or whether the author is just wrong.

Hupalo gives an example starting on page 128 of providing a company car which is used 100% for personal use, just as an extreme case to show that it's better to provide fringe benefits even if the benefit is fully taxable. The tax rate used is 33% and employment taxes are ignored. He says that if you were to purchase/lease a $6,000 car, you would actually need to earn $9,000 since $3,000 is paid in taxes. Then he goes on to say that if the corporation pays for the car as a fringe benefit, the actual cost is only $6,020. He says this is because the corporation is no longer taxed on the $6,000 and so it saves $1,980 in taxes and the individual pays $2,000 in taxes because the car is reported as income, so $6,000 - $1,980 + $2,000 = $6,020.

The first part makes sense to me. To buy a $6,000 car personally, you need to earn $9,000 first. However, I'm just not following the reasoning in the second part because it seems like the total earnings would need to be $9,000 there as well.

First of all, I don't see how the $1,980 that the corporation supposedly saved in taxes is actually saved. The $1,980 is part of the $6,000 which the corporation no longer has and not savings applied to additional income, so the corporation has still lost a total of $6,000. Secondly, wouldn't the $2,000 in taxes that the recipient pays also be taxed as income, thereby requiring before tax earnings of $3,000 so that there is $2,000 left over to pay the taxes on the car? If these two adjustments are correct, that brings the cost right back to $9,000 in before tax earnings, the same as if the car had been purchased/leased directly by the individual. Am I missing something or is the book wrong?

My apologies if this has been asked before - I did try searching for it on this board first, but I may have missed it.

Thanks,
- Tim Macinta