Common S Corp deductions include ordinary and necessary business expenses such as reasonable salaries, payroll taxes, employee benefits (including health insurance), rent, office supplies, software, marketing, and professional fees. Shareholders can also deduct business-related travel, vehicle expenses, depreciation, and a portion of home office costs.
The Complete List of S Corp Tax Deductions
The most common itemized deductions are those for state and local taxes, mortgage interest, charitable contributions, and medical and dental expenses. The combined revenue cost of those four deductions is around $118 billion for fiscal year 2024 (table 1).
The "2% rule" for S Corporations treats shareholders owning more than 2% of the company's stock (or voting power) differently for fringe benefits, classifying them like partners in a partnership, not regular employees; this means benefits like health insurance premiums paid by the S Corp must be included as taxable wages on their W-2, rather than being tax-free, though the shareholder can often deduct these premiums as an "above-the-line" deduction. This rule prevents them from participating in tax-advantaged Section 125 cafeteria plans, making benefits like Health FSAs unavailable on a pre-tax basis.
S-Corp election lets you split your profits into “shareholder wages” (subject to 15.3% self-employment taxes) and “distributive share” (NOT subject to 15.3% self-employment taxes). Active owners in an S-Corp must pay themselves a reasonable salary, but realize a 15.3% savings on the rest of their retained profits.
Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.
Many business expenses are 100% deductible, including advertising, employee wages, rent, supplies, and certain business meals like company parties or meals for the public, while personal deductions like student loan interest or charitable donations (depending on the type) can also be fully deductible for individuals. The key is that the expense must be "ordinary and necessary" for your trade or business or meet specific IRS criteria, often differentiating from the 50% rule for client meals.
Can I deduct 100% of my car expenses through my S Corp? You can only deduct the business-use percentage of your vehicle expenses. Personal use isn't deductible. If you use your car 80% for business, you can deduct 80% of actual expenses or claim 80% of your business miles at the standard rate.
QBI component.
This component allows qualifying taxpayers to deduct 20% of their qualified business income from a domestic business, whether it's operated as a sole proprietorship, S corporation, partnership, estate, or trust.
S-Corp reasonable salary is the market-rate compensation you must pay yourself before taking distributions, typically ranging from $40,000-$150,000+, depending on your role, industry, and location. The IRS requires this to prevent payroll tax avoidance, with penalties reaching 20% plus interest for non-compliance.
Expensing an item may bring in more money in the short term, but once you have expensed it, it does not qualify for write-offs on future tax returns. Depreciating an asset may result in less money upfront, but could result in fewer taxes owed in the future.
The IRS allows taxpayers to deduct up to $3,000 of realized investment losses ($1,500 if married filing separately) against ordinary income each year. This deduction applies only to losses in taxable investment accounts and must be realized by December 31st to count for that tax year.
Allowable expenses include your basic office costs such as stationery and the bills you pay on your business phone. Travel costs and staff salaries are also included, as is the cost of a uniform or other appropriate clothing (for example, if you work in a skilled or manual trade).
20 Common Tax Deductions: Examples for Your Next Tax Return
What Expenses Can a Company Director Claim?
Common S Corp mistakes include paying owners too little or too much salary (reasonable compensation issues), failing to separate personal and business expenses, missing payroll tax deposits, improper health insurance deductions for >2% owners, and inadvertently terminating S Corp status by adding ineligible shareholders. Proper setup, diligent record-keeping, and understanding IRS rules on payroll, expenses, and shareholder limits are crucial to avoid penalties and audits.
Common S Corp Deductions
Some key features of S corporations are: They do not pay federal income taxes. They're limited by the types of owners (shareholders) and cannot exceed 100 shareholders. A separate bank account and separate records are required with this form of business.