S Corp Business Expenses: Everything You Need to Know
Understanding all relevant s corp business expenses can help you plan ahead. This is why you need to maintain accurate records regarding all associated expenses and income.3 min read
2. S Corporation Tax Reporting
3. Deductions and S Corporations
4. Consult the Experts
5. Reimbursement of Expenses Required
6. How to Consider Business Expenses as Deductible?
Understanding all relevant s corp business expenses can help you plan ahead. This is why you need to maintain accurate records regarding all associated expenses and income. In turn, these expenses can be passed to the company's shareholders, reducing the amount of taxes they owe on their personal tax returns.
S Corporation Defined
An S corporation is a business entity that is limited to a maximum of 100 shareholders. By following certain restrictions, this type of business can be treated as a “pass-through” entity for tax purposes. In comparison to a C corporation, an S corporation is not taxed on its yearly earnings. Instead, all income and expenses are distributed among the S corporation's shareholders.
These shares are based on ownership percentage. Based on each person's share, he or she will then report this activity on an individual tax return. In terms of taxation, an S corporation can either be a limited liability company or a corporation that has made a subchapter S election. Deductible expenses are then used to either decrease the shareholders' taxable income or are applied as credits for individual owners.
S Corporation Tax Reporting
For an individual to claim deductions, the S corporation must file a 11205. This will notify the IRS of the S corporation's annual activity. In addition, each shareholder must be given a K-1. This document details each shareholder's shares of the expenses and overall income. At the end of the K-1, shareholders will find detailed instructions to correctly report all S corporation income and expenses.
This is an ideal business structure that allows a small business to operate as a separate entity. In turn, the business does not need to pay taxes at the corporate level. By maximizing deductions, you can save immensely on your taxes.
Deductions and S Corporations
The challenge when completing a K-1 for an S corporation is to determine whether expenses will be used as deductions on individual tax returns or to calculate the net income of the S corporation. For K-1 purposes, ordinary business income is stated on line 20 of the company's 1120S.
Business owners are aware that they need to spend money in order to make money. However, not all are aware that spending that money can bring additional benefits. As your business grows, the money you spend can be deducted from your business income. For example, an S corporation can subtract everything from advertising to rent, taxes to employee benefits.
Consult the Experts
If you would like to form an S corporation, it is recommended that you seek legal advice. An attorney can help ensure that all of the required documentation is filed with the right agencies — both at the state and federal levels. If you currently own an S corporation or are a shareholder, it is recommended that you hire a certified accountant to ensure compliance.
Reimbursement of Expenses Required
If you have paid expenses that should be claimed by your S corporation, you can be reimbursed. Keep all associated receipts and turn them over to the company. If you are regularly paying for expenses yourself, then you should seek an expense reimbursement claim form. Beware that if you do not submit these expenses to the company, you will not be able to claim them on your personal tax return.
How to Consider Business Expenses as Deductible?
Business expenses are typically considered to be deductible as long as these conditions are met:
- The expenses were necessary in order to conduct business
- You have kept all associated records to prove your claims to the IRS
- The expense amount needs to be reasonable based on your circumstances
When it comes to your corporation's business expenses, it is important to plan ahead and remain organized. Have a dedicated place where you store all physical records, and, for large expenses, also keep a digital copy. That way, when the time comes to file your taxes, you are not scrambling. In addition, the more organized you are, the more deductions you will be able to claim. In turn, this can help you save a significant amount of money. And remember, if you have any questions, it is recommended that you seek a professional opinion.
If you need help understanding your s corp business expenses, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.