Question 1

At what point does converting from a sole proprietorship to a corporation become advantageous?

Accepted Answer

*Three tax-related benefits of converting to a corporation in August

1) Optimized year-end settlement and workplace-based health insurance
As a corporate representative, you can take advantage of the year-end tax settlement. Sole proprietors have limited deductions, but as a corporate representative you can enjoy personal, insurance, and pension-savings deductions. You also convert from regional to workplace health insurance.

2) Aligned with next year's business plan
Converting in August (mid-year) lets you adapt to the corporate structure during the remainder of the year and prepare the corporation's first-year business plan starting January 1.

3) Corporate tax-rate advantage
The top personal income tax rate is 45%, while corporate tax tops out at 24% by bracket, so the larger the revenue the more favorable the corporate rate.

Question 2

Is leased-vehicle insurance eligible for a tax credit?

Accepted Answer

1. Auto insurance is a guaranteed-type insurance and in principle qualifies for a tax credit
2. When the leasing company pays the auto insurance on behalf of the lessee and charges it back as part of the lease fee, it is considered part of the lease fee
3. Therefore, it does not qualify for the tax credit

Question 3

What are the pros and cons of converting a sole proprietorship into a corporation?

Accepted Answer

1. Pros
   Corporate tax rates are lower than a sole proprietor's comprehensive income tax rate, enabling tax savings
   You can reasonably reduce tax through representative salary and dividends
   Running the business under a corporate name boosts credit rating and access to loans and finance

2. Cons
   When shareholders or representatives need funds through salary or dividends, additional accounting and tax reporting is required
   Bookkeeping and tax filings are more complex

Question 4

Can I expense a business-use passenger car purchased in the company's name?

Accepted Answer

1. Only up to KRW 8 million per year of depreciation or lease fees is deductible
2. Total expenses including fuel, insurance, and auto tax are limited to KRW 15 million per year

Any excess over these limits can be carried forward and deducted in later years

Question 5

Do I have to keep a driving log?

Accepted Answer

1. If annual business-use vehicle expenses exceed KRW 15 million, a driving log is mandatory
2. If KRW 15 million or less, expenses can be recognized within a certain range without a driving log

Question 6

How do I handle the disposal of a business-use passenger car?

Accepted Answer

1. A taxable business must issue a tax invoice and report the sale
2. Gains are added to income; losses are recognized up to KRW 8 million per year
3. Any excess disposal loss is carried forward and expensed at KRW 8 million per year

Question 7

What are the penalties if a corporation fails to submit a diligent-filing confirmation report?

Accepted Answer

1. Penalty for non-compliant diligent filing
   MAX(5% of the calculated tax, 0.02% of revenue)
2. Becomes a cause for ad-hoc tax audit selection
3. Sanctions against the confirming preparer (for false reports)
4. Treated as a late corporate tax filing

Frequently Asked Questions (FAQ)

Frequently Asked Questions