S Corp Tax Deductions: Everything You Need to Know
S corp tax deductions are passed through to the shareholders, who can then set them off against their incomes, while calculating their individual tax liabilities.3 min read
2. How S Corp Tax Deduction Works
3. S Corp Special Case Benefit: No Corporate Income Tax
4. Ways to Save up Through S Corp Tax Deductions
Updated October 16,2020:
S corp tax deductions are passed through to the shareholders, who can then set them off against their incomes, while calculating their individual tax liabilities.
What Is an S Corporation?
- S corp is a special status granted to a limited liability company under the federal tax law.
- For the purpose of taxation, an S corporation passes through its earnings, gains, losses, and deductions to its owners, also known as shareholders.
- It protects your liability while still offering the benefits of personal taxation.
- In order to apply for the S corporation status, a company must meet the following requirements:
- It must be a domestic company.
- It must not have more than 100 shareholders.
- All shareholders must be either individuals, estates, or certain eligible trusts and tax-exempt entities.
- All individual shareholders must be either U.S. citizens or resident aliens.
- It must not offer more than one class of stock.
How S Corp Tax Deduction Works
- Choosing an S corporation status saves the owners from paying self-employment and social security taxes on the business profits.
- Profits of S corporations are split into distributable shares and wages of shareholders. Only the wages are subject to a tax of 15.3 percent.
- Shareholders can also avoid the Medicare surtax of 3.8 percent levied under the Affordable Healthcare Act.
- Shareholders can set off S corporation losses against their individual taxable incomes.
- An S corporation makes it easier to claim legitimate tax deductions.
S Corp Special Case Benefit: No Corporate Income Tax
- Unlike in case of a standard company, the corporate income tax does not apply to an S corporation.
- Normally, companies pay higher income taxes under the corporate tax bracket. When they distribute their profits in the form of dividends, shareholders again pay taxes on their shares of earnings. In the case of an S corporation, you can avoid this double taxation.
- Taxpayers subject to the Affordable Healthcare Act surtax and millionaire tax hikes can save even more since they pay taxes at higher rates.
- S corporation status is more beneficial for smaller companies since they don't have to pay corporate income taxes. Individual shareholders pay income taxes at lower rates depending upon the tax brackets they fall into.
Ways to Save up Through S Corp Tax Deductions
Rent Your Home
- Since an S corporation is a different legal entity, you can rent your home to it. It can be for meetings, trainings, and various other purposes. The rental income you get from you company is tax-free. Additionally, the company too can deduct the expenses from its earnings. You need not report the rental income if you have rented your home for not more than 14 days in a financial year.
- However, the amount of rent must be fair, based upon your area. Secondly, your company should have a genuine need to take the property for rent.
- Make sure the company documents the activities and supports them with sign-in sheets, meeting minutes, and other relevant material.
- Get Form 1099 from your company and report the rental income while calculating your personal income taxes.
Deduct Your Health Policy Premiums
- Whether your S corporation reimburses you or directly pays your health insurance premiums, you can add them as income to your W-2 form and save on Social Security taxes.
Claim Your Vehicle Expenses
- When you use your vehicle for business, you can claim the expenses as deductions.
- Be sure to record the odometer readings along with the usage details.
Don't Sell Your Vehicle
- If the vehicle you use for business gets old, don't sell or exchange it.
- Instead, put it in personal use. This way, you can continue to keep the losses arising out of depreciation until you finally dispose of the vehicle.
- However, make sure you make adjustments for non-business use.
Gift and Leaseback a Vehicle
- If the business vehicle you own is fully depreciated, gift it to someone in your family and lease it back for business. This will help you make further deductions in respect of the vehicle.
- However, you must satisfy certain terms and conditions. Be sure to consult your tax advisor.
Buy a Medical Expense Reimbursement Plan
- Use a Medical Expense Reimbursement Plan to reimburse the expenses of your employees along with those of their spouses and dependent family members.
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