One key strategy to maximize your tax savings with an S Corporation is to pay yourself a reasonable salary. As an S Corp shareholder, you can receive income in the form of both compensation and distributions.
For example, if you invested $10,000 into your business but the business lost $30,000, as an S Corp shareholder you can only deduct losses up to the amount of your shareholder basis (in this example, $10,000). Think of Google. You invested $10,000 into Google stock and they go out of business, you only lose $10,000.
S Corps that lose their “S” status must typically wait five years before being able to re-elect it.
Auto Expenses
The business portion of vehicle expenses is tax deductible for an S-Corp. If the vehicle is used both in a personal capacity and a business capacity, then only the business portion is deductible.
If you use your car only for business purposes, you may deduct its entire cost of ownership and operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.
The S corporation can pay you rent for the home office. The S corporation can pay you for the costs of a home office under an “accountable” plan for employee business expense reimbursement. Accountable Plan for S-Corporation Deductions and Reimbursements.
Some unique income tax rules apply to S corporations regarding compensation and fringe benefits paid to shareholders who own greater than 2% of the corporation. Under these S corp income tax rules, a greater than 2% shareholder is taxed as a partner in a partnership for fringe benefits received.
Because of the one-class-of-stock restriction, an S corporation cannot allocate losses or income to specific shareholders. Allocation of income and loss is governed by stock ownership, unlike partnerships or LLCs taxed as partnerships where the allocation can be set in the partnership agreement or operating agreement.
If you're an S corp owner with a profitable business—and you don't take part in your company's operations as an employee, i.e. you are only a shareholder—you can take distributions of your business's earnings as payment.
If you file as an S corporation, then deduct your bad debt on Line 10 of Form 1120-S U.S. Income Tax Return for an S Corporation.
If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.
Loans made by shareholders to the s corp enjoy the same protection of assets as a third party lender has, as long as the S corp and the shareholder conclude a bona fide debt agreement. A bona fide agreement has the following requirements: ⇒ The parties agreed in writing.
The 60/40 rule is a simple approach that helps S corporation owners determine a reasonable salary for themselves. Using this formula, they divide their business income into two parts, with 60% designated as salary and 40% paid as shareholder distributions.
You use the phone for business purposes 70% of the time and for personal reasons 30% of the time. You can use an accountable plan to reimburse yourself for 70% of the cost. This means getting $70 out of your company, tax-free, to pay for your phone bill each month. Your business can then write that off as an expense.
The direct answer to whether an S Corp can pay a shareholder's mortgage is no. Personal expenses, including mortgage payments, cannot be directly paid by the corporation without significant tax implications and potential violations of IRS regulations.
As a pass-through entity, one of the biggest tax advantages of the S corp business structure is that it avoids double-taxation, which means S corps don't have to pay taxes at the federal level the way C corps do. Instead, S corp profits are only taxed once, on the personal tax returns of individual shareholders.
From a tax perspective, it makes sense to convert an LLC into an S-Corp, when the self-employment tax exceeds the tax burden faced by the S-Corp. In general, with around $40,000 net income you should consider converting to S-Corp.
The Advantages of LLCs
LLCs provide more flexibility than S Corps. For S Corps, there are pro-rata requirements for items of income, loss, or distributions. Conversely, owners of LLCs may specially allocate income, loss, and distributions within the parameters of the tax law.
The S Corporation can either purchase the policy in your name or reimburse you for the premiums you paid.
As long as the shareholders approve, there are no restrictions on purchasing property for rental purposes. There are restrictions on the income derived from the property, though. The S Corporation is taxed as a pass-through entity and profits and losses pass through to its shareholders.
Is there a minimum salary for S Corp shareholder-employees? No — the IRS can't require a minimum salary for self-employed workers.
You can rent property to your business when you own real estate or personal property that your business can use. If you own a C corporation and want to take advantages of certain tax benefits, then the transaction should be treated as an arm's length transaction and should have a valid business purpose.
Yes, there is a way to claim a home office deduction with an S Corp. Prior to the IRS making a recommendation to use the Accountable Plan and subsequent reimbursements to the employee (or shareholders), taxpayers would charge their corporation rent and declare the rent as income on Schedule E.