Key Takeaways

  • Ordinary and necessary expenses are deductible by S corporations, but must be well-documented.
  • Capital assets (like equipment) have different tax treatment from regular business expenses.
  • Common S corp deductions include salaries, benefits, home office use, vehicle expenses, depreciation, and professional services.
  • S corp tax deductions 2023 also include retirement plan contributions and business insurance premiums.
  • Only wages—not distributions—are subject to self-employment taxes, helping reduce overall tax burden.
  • Proper recordkeeping and tax planning (e.g., shifting income/taking credits) further maximize savings.

S corporation write offs are costs that you have incurred while operating your business that can be removed from your income, thus reducing the amount of tax you'll be paying. Every individual with a business knows that "You need to spend money to earn money." One of the things you might overlook is the fact that you can enjoy multiple benefits by spending that money. Starting and growing your business are two valid reasons for spending. Don't forget that a large chunk of money spent on business operations and growth can be deducted when determining your taxable income.

Business Deductions: Critical for Tax Savings

There are two considerations to keep in mind when determining whether business expenses are deductible:

  1. The expenses are considered ordinary and necessary.
  2. You have retained all records the IRS needs to process your claims.

Recording deduction-worthy expenses quickly and going over your documents to search for all valid deductions are two simple strategies to reduce your taxable income. Other means of reducing income would be shifting income to a different tax year or taking advantage of tax credits.

Maximizing your deductions is the first step towards increasing your tax savings. Tax deductions are helpful, especially in the first year, but always make sure that these are justifiable from a business operations perspective.

Business deductions have certain thresholds to satisfy:

  • Capital asset versus business expense. If an item bought is expected to last for more than a year, it's a capital asset. To cite an example, purchasing copy paper is a business expense but acquiring a photocopying machine is not. Capital assets are taxed differently than business expenses.
  • Appropriateness of the expense. Was the expenditure an ordinary expense and necessary for your business operations?
  • Relation to a business activity. The Internal Revenue Service (IRS) strictly monitors if taxpayers try to write off items as business expenses that in reality are personal expenses. If an expense is not totally for business, this should be declared under the personal section and only the portion that was used for business should be claimed.
  • Records to support the deduction. In order to show that your business expenses are indeed paid, you need to provide documents like receipts and invoices to prove this. Failing to do so may prompt the IRS to calculate your tax liability differently.

Most Common S Corp Tax Deductions in 2023

Here are some of the most common and impactful deductions S corporations can claim in the 2023 tax year:

  • Employee Wages and Payroll Taxes: Reasonable salaries paid to shareholders or employees are deductible business expenses. These include withheld federal taxes, Social Security, and Medicare contributions.
  • Employee Benefits: Health insurance premiums, education assistance, life insurance, and other fringe benefits are generally deductible if offered to employees under a bona fide plan.
  • Business Use of Home: If you run your S corp from a dedicated home office, you may deduct a portion of your home expenses such as utilities, rent/mortgage interest, and internet costs, proportionate to business use.
  • Vehicle Expenses: If you use your vehicle for business, mileage, maintenance, lease payments, and depreciation may be deductible. Be sure to distinguish between personal and business use.
  • Professional Services: Fees paid to accountants, legal advisors, consultants, or marketing firms are all deductible if related to operating your business.
  • Depreciation: Capital assets like machinery, furniture, or technology used in your business may be depreciated over time using IRS guidelines or bonus depreciation where applicable.
  • Office Supplies and Utilities: Everyday operating costs including office supplies, phone lines, internet service, and utilities are fully deductible.
  • Insurance Premiums: Business liability insurance, property insurance, workers’ compensation, and even cybersecurity insurance are valid deductions.
  • Advertising and Marketing: Expenses for advertising, websites, digital campaigns, and even promotional items are eligible write-offs.
  • Retirement Contributions: Contributions made by the S corp to employee retirement plans (e.g., SEP IRA, SIMPLE IRA, or 401(k)) are deductible for the corporation.

What is an S Corporation?

An S corporation is an election under federal tax law where a business first starts out as a corporation or LLC and then chooses taxation as an S corporation. This means that your business has legal status as one entity, but is taxed as an S corporation. S corporations are beneficial for business owners because of the liability protection and personal taxation options they provide.

A corporation or an LLC must meet the following criteria before they can elect S corporation status.

  • Be a domestic corporation
  • Have fewer than 100 shareholders
  • Ensure shareholders are U.S. Citizens, resident alien individuals, estates, or certain types of trusts and tax-exempt entities
  • Offer only one class of stock

Entrepreneurs and business owners should have a good understanding of how S corporations save small business owners tax. One of the tax loopholes with S corporation status is that the business owner can avoid self-employment taxes apart from Social Security and Medicare. Employee wages and most employee benefits, including your own, can be deducted as long as you remember to list them as expenses on your Form 1120-S, which is used to file an S corp tax return.

Here's a simple calculation to give a clear example. Let's say your business makes $150,000 in profits per year. With this, you need to pay taxes to the federal government and to your state government. In the typical scenario, let's assume a $15,000 tax payment to the federal government and another $7,500 to the state government. But don't forget the other types of taxes you need to settle. If your business is a sole proprietorship or partnership, you'll need to pay another 15.3% in self-employment taxes. If you run your business as a regular corporation, you also need to pay Social Security and Medicare taxes on roughly 15% of your profits.

For S corporations, the business profits can be split into two categories: distributive share and shareholder wages. Only the shareholder wages will be subjected to 15.3% tax. Suppose your $150,000 profit was split into shareholder wages where you allocate $40,000 as your pay and the rest as distributive share. In this scenario, only the $40,000 will have the 15.3% self-employment tax and about $6,000 for Social Security and Medicare taxes. This means that you're saving around $16,500 by lodging portions of your profit to non-wages distributive share.

Strategic Use of Deductions to Reduce S Corp Tax Liability

Tax deductions for S corporations not only reduce taxable income, but also offer flexibility in how profits are distributed. The IRS requires that shareholders receive a “reasonable salary” before taking additional profits as distributions. A well-balanced split between wages and distributions allows business owners to reduce self-employment taxes.

Some tips to strategically reduce tax liability include:

  • Structuring compensation wisely: Pay yourself a reasonable salary and allocate excess profits as distributions to reduce exposure to payroll taxes.
  • Leverage the Section 179 Deduction: This allows S corps to deduct the full purchase price of qualifying equipment or software purchased or financed during the year, up to $1,160,000 in 2023.
  • Utilize Bonus Depreciation: For 2023, bonus depreciation allows businesses to deduct a large percentage of qualified asset costs upfront.
  • Carryforwards: If your business has net operating losses (NOLs), these may be carried forward to offset future profits, reducing future tax liability.

Proper documentation and understanding IRS expectations are critical in ensuring deductions are valid and compliant.

Frequently Asked Questions

  • What qualifies as a tax deduction for an S corp in 2023?
    Any expense that is ordinary, necessary, and directly related to your business operations—such as wages, office supplies, insurance, and depreciation—can be deducted.
  • Can S corporations deduct health insurance premiums?
    Yes, premiums paid for employee health insurance, including plans for shareholder-employees owning more than 2%, are typically deductible.
  • Are home office expenses deductible for S corps?
    Yes, if the space is used regularly and exclusively for business. A reimbursement arrangement is often used, where the business reimburses the owner for their pro-rata expenses.
  • How does an S corp owner reduce self-employment taxes?
    By paying a reasonable salary and classifying the remaining income as a distribution, only the salary portion is subject to Social Security and Medicare taxes.
  • What records should I keep for S corp deductions?
    Retain receipts, invoices, mileage logs, payroll reports, and formal agreements. The IRS requires thorough documentation to support deduction claims.

With so many potential deductions at your fingertips, you may want to consider finding quality legal advice. If you need help and further information about S corporation write offs, 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 average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.