Essential Deductions Every S-Corp Shareholder Should Know

Owning an S-corporation offers a range of financial benefits, but it also brings unique tax responsibilities. For S-Corp shareholders before year-end, understanding how to optimize these opportunities can make a big difference in reducing taxes while keeping your business compliant with IRS rules.

Balancing Salary and Distributions

One of the most important considerations for S-Corp shareholders is how they balance salary and distributions. The IRS requires that shareholders who actively work for the business pay themselves a “reasonable salary” that is subject to payroll taxes. Any remaining profits can be distributed as dividends, which are not subject to payroll taxes. By ensuring your salary aligns with industry standards and accurately reflects your role, you can avoid IRS scrutiny while using distributions to reduce your overall tax burden.

Maximizing Health Insurance and Retirement Contributions

Health insurance premiums can offer a significant tax-saving opportunity for S-Corp shareholders who own more than 2% of the business. Premiums paid through the corporation are deductible, provided they’re included in your W-2 wages and reported on your personal tax return. This approach allows you to claim the self-employed health insurance deduction, reducing your taxable income on an expense you’re already covering.

Retirement contributions provide another powerful tax shield for S-Corp owners. Plans like a Solo 401(k) or SEP IRA allow you to save for the future while lowering your taxable income. Contributions made by the business are deductible, and the limits on these contributions can be substantial depending on your earnings. This dual benefit of tax savings and retirement preparation makes setting up a plan a wise move for many shareholders.

Taking Advantage of Home Office and Expense Reimbursements

To claim deductions for using a home office, S-Corp shareholders must follow a specific process. Unlike sole proprietors, shareholders cannot deduct home office expenses directly on their personal tax returns. Instead, the corporation must reimburse you for these expenses under an accountable plan. This reimbursement is tax-free and allows you to deduct a portion of expenses like rent, utilities, and internet that relate to your business use of the home.

An accountable plan is also essential for managing business expense reimbursements. This written policy allows your S-Corp to reimburse you for out-of-pocket business expenses, such as travel, meals, and supplies, without the reimbursements being taxed as income. These expenses must be documented and substantiated, but when done correctly, they become fully deductible for the corporation while remaining tax-free for you.

Taking full advantage of these deductions requires careful planning and recordkeeping. Overlooking a key requirement or failing to document your expenses properly can lead to missed opportunities or IRS penalties. If you need assistance navigating these strategies and ensuring your tax situation is optimized, we’re here to help. Contact us at info@mkhstaxgroup.com for expert guidance tailored to your needs.