Key Takeaways

  • S corporations can deduct a wide range of ordinary and necessary business expenses to reduce taxable income.
  • Eligible deductions include employee salaries, benefits, home office use, vehicle expenses, depreciation, and retirement contributions.
  • Shareholders can be reimbursed for business-related expenses through an accountable plan to maximize tax advantages.
  • There are lesser-known deductions like depreciation of office equipment, startup costs, and educational expenses.
  • Proper documentation and compliance with IRS rules are essential to claim deductions and avoid penalties.

One type of limited liability company that can be beneficial to many small businesses is an S corporation or Subchapter S corporation (S corp). Small businesses and companies elect or choose to be classified as an S corp after they have been incorporated. The election allows the business to act as a separate entity while protecting the owners from certain financial and legal liabilities. It also lets the owners avoid having to pay corporate-level taxes.

Classified by the IRS as limited liability corporations (LLCs), S corps are limited to:

  • 100 shareholders or owners
  • Individuals
  • Special estates and trusts. 

Like LLCs, S corps are “pass-through” entities, or businesses whose profits, expenses and losses, deductions, and credits go to the owners, who then report that information on their personal income tax returns.

Reporting S Corporation Profits and Losses 

Although S corporations do not personally pay taxes because the tax responsibility is passed on to the owners, each S corp is required to file Form 1120S with the IRS. Form 1120S, or an Income Tax Return for an S Corp, gives the IRS details on the S corporation's financial activities to compare with the individual shareholders' returns.

Each shareholder reports the S corps income and expenses based on his or her percentage of ownership on individual returns via form Schedule K-1. For owners, S corp profits are divided into two categories:

  • Shareholder wages — a wage paid to owners that is subject to a 15.3 percent tax.
  • Distributive share — a division of income, loss, deduction, or credit from the S corp to the owners or partners, based on each shareholder's percentage of ownership. It is not subject to tax

S Corporation Deductions 

Typically, S corporation deductions are “ordinary and necessary” business expenses incurred by the S corp that reduce the taxable income. These expenses can include:

  • Business losses
  • Rent
  • Advertising
  • Employee benefits.

They must be claimed on the S corporations Form 1120S, as well as the owners' individual returns and K-1 forms.

Other deductions, which can save your business hundreds of dollars, include:

  • Using your home as an office or renting your home to your S corporation.
  • Health insurance.
  • Business vehicle expense deductions.
  • Avoiding Medicare taxes.
  • Medical Expense Reimbursement Plans or MERPS.

Lesser-Known Tax Deductions for S Corps

In addition to commonly claimed expenses, S corporations may qualify for less obvious deductions that can offer significant tax benefits:

  • Depreciation of assets – Computers, furniture, and equipment can be depreciated over time using Section 179 or bonus depreciation.
  • Startup costs – Up to $5,000 of organizational and startup expenses can be deducted in the first year.
  • Continuing education – Business-related courses, certifications, and training for shareholders or employees may be deductible.
  • Business meals (50%) – Meals with clients or employees that are necessary and directly related to the business.
  • Charitable contributions – If made directly by the S corp, they flow through to shareholders and can be deducted on their personal returns.
  • Software and SaaS fees – Regular subscription services used in the course of operations, like CRMs or design tools.
  • Telephone expenses – Business use of personal cell phones may be partially deductible if substantiated.
  • Health reimbursement arrangements (HRAs) – Allow the business to reimburse employees for medical expenses tax-free.
  • Retirement plan contributions – Contributions to SEP IRAs, SIMPLE IRAs, or solo 401(k) plans for owners and employees.

These write-offs should be used strategically with the guidance of a tax advisor to ensure compliance with IRS regulations​​​.

New Heading: Common S Corp Deductions Explained

S corporations can deduct many ordinary and necessary expenses that directly relate to business operations. These deductions help reduce the S corp’s taxable income passed through to shareholders. Common deductions include:

  • Employee wages and salaries
  • Contractor payments (Form 1099 required)
  • Rent or lease of office space
  • Advertising and marketing costs
  • Office supplies and software subscriptions
  • Utilities and internet services
  • Legal and professional fees
  • Travel and lodging related to business
  • Business insurance premiums
  • Interest on business loans

Each expense must be documented and reported properly to be considered deductible. It’s crucial that these costs are clearly separated from personal expenses.

Common S Corp Deductions Explained

S corporations can deduct many ordinary and necessary expenses that directly relate to business operations. These deductions help reduce the S corp’s taxable income passed through to shareholders. Common deductions include:

  • Employee wages and salaries
  • Contractor payments (Form 1099 required)
  • Rent or lease of office space
  • Advertising and marketing costs
  • Office supplies and software subscriptions
  • Utilities and internet services
  • Legal and professional fees
  • Travel and lodging related to business
  • Business insurance premiums
  • Interest on business loans

Each expense must be documented and reported properly to be considered deductible. It’s crucial that these costs are clearly separated from personal expenses.

S Corporation Expenses and Reimbursements 

Expenses are those costs the S corporation incurs during the course of its business activities. In addition to the deductions discussed above, which are reimbursable expenses, there are some expenses that are not reimbursable or deductible. These may include:

  • The use of a personal vehicle for business activities
  • Parking and tolls
  • Meals and entertainment
  • Other out-of-pocket expenses.

The owners being reimbursed under an accountable plan receive the greatest tax savings because the payments are usually tax-free. The S corporation also benefits because it can deduct the amount of the reimbursement from the business income.

Setting Up an Accountable Plan

To maximize deductions and minimize tax liability, S corps should establish an accountable plan to reimburse shareholders or employees for out-of-pocket business expenses. Under an accountable plan:

  • Reimbursements are not reported as income.
  • The S corp can deduct the reimbursed amounts.
  • The plan must require proper documentation (receipts, mileage logs, etc.).
  • Any excess reimbursement must be returned to the company.

Expenses covered under an accountable plan may include home office use, mileage, travel expenses, business meals, and work-related supplies. Without an accountable plan, reimbursements may be treated as taxable income to the recipient.

Advantages and Disadvantages

Many of the benefits of an S corporations are tax-related. This can help owners reduce their tax burden and avoid double taxation To benefit from the many advantages and tax breaks, S corp owners need to know:

  • How to report S corp finances on their returns
  • How taxes are determined
  • What business expenses are deductible or reimbursable
  • Other deductions or credits available.

The three primary disadvantages to an S corporation are:

  • S corporations being subject to the same filing requirements as standard corporations. They must regularly file various business, government, and tax forms as well as financial documents.
  • Keeping S corporation and personal expenses separate and well-documented, which requires ample time, effort, and money.
  • Being in a state that does not acknowledge S corporations, and thus losing the tax benefits, or being in a state that significantly limits the tax breaks available.  

Comprehensive research and accurate bookkeeping are useful in keeping track of expenses, losses, and profits, ensuring reimbursement will be easier to manage. Proper accounting practices assist in avoiding mixing up personal and business finances, which can cause you to miss deductions and credits or having some of those benefits discounted by the IRS. An "Employee Expense Report" form, which breaks down all employee-related expenses, can be useful your S corp in keeping everything organized.

Frequently Asked Questions

1. What is the best way to track S corp deductions? Use accounting software or spreadsheets to record each expense, keeping receipts and mileage logs where applicable. Consider hiring a tax professional for compliance.

2. Can S corp shareholders deduct unreimbursed expenses? Generally, no. The IRS eliminated most miscellaneous itemized deductions, including unreimbursed employee expenses, under the Tax Cuts and Jobs Act (2017-2025).

3. Are home office expenses deductible for an S corp? Yes, but only if the corporation has an accountable plan and reimburses the shareholder-employee for qualified use. Direct deductions are not allowed on the shareholder’s return.

4. Can an S corp deduct vehicle expenses? Yes, if the vehicle is used for business. The company can reimburse mileage at the IRS standard rate or deduct actual vehicle expenses if the vehicle is owned by the business.

5. What deductions require special IRS forms or elections? Deductions like depreciation (Form 4562), retirement contributions, and startup costs may require additional forms or elections to be properly claimed.

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