An S Corporation (S Corp) can write off "ordinary and necessary" business expenses, which are costs directly related to operating the business. These deductions are taken at the corporate level to reduce net taxable income, which then passes through to the shareholders' personal tax returns.
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.
Rent for offices, storefronts, or warehouses is fully deductible. Business utilities like electricity, water, gas, heating, internet, and phone lines also qualify. Expenses must be for business use only. Commercial spaces allow 100% deduction of rent and utilities.
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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.
You might be surprised to learn that simple business expenses like your cellphone bill or your new computer can be deducted from your taxable income. In fact, there are some fully-deductible expenses such as advertising and marketing costs, employee education and training, and certain legal fees.
Capital allowances are a valuable form of tax relief that allow businesses to deduct the cost of qualifying capital expenditure from taxable profits, reducing corporation tax liabilities. This relief is particularly relevant for companies investing in assets such as plant and machinery or structures and buildings.
The biggest tax mistakes people make include filing late, math errors, incorrect personal info (like Social Security numbers), forgetting deductions/credits (like EITC), misreporting income, not signing forms, and making errors with bank details for direct deposit, all leading to delays, penalties, or missed savings, with using tax software or professionals helping avoid these common pitfalls.
To maximize your deductions, you'll have to have expenses in the following IRS-approved categories:
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.
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Furniture, supplies, equipment. Insurance. Marketing expenses like signs, flyers, website, agency or freelance costs. Technology needs including laptops, phones, tablets, credit card payment processing systems, software like customer relationship management systems, inventory programs and more.
How do profitable corporations get away with paying no U.S. income tax? Their most lucrative (and perfectly legal) tax avoidance strategies include accelerated depreciation, the offshoring of profits, generous deductions for appreciated employee stock options, and tax credits.
The $20,000 limit under the measures applies on a per asset basis, so small businesses can instantly write off multiple assets. Assets valued at $20,000 or more can continue to be placed into the small business pool and depreciated at 15% in the first income year and 30% each income year after that.
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