S Corporations can claim deductions for ordinary and necessary business expenses incurred to operate, which are passed through to shareholders to reduce their taxable income. Key deductible expenses include reasonable officer salaries, employee benefits/health insurance, marketing, professional fees, home office (via accountable plan), and depreciation.
The Complete List of S Corp Tax Deductions
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.
When you're an S corp owner with more than 2% of the company stock, you're treated the same as a self-employed person when it comes to deducting health insurance premiums. As a result, you can take advantage of the self-employed health insurance deduction.
Business owners may qualify to claim the home office deduction if they have their own business and use a portion of their home as their principle place of business. The S corporation can pay you rent for the home office.
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.
How Can Business Deductions Lower S Corp Taxes?
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.
While the self-employed health insurance deduction is an adjustment to your income and can only be taken by self-employed workers, medical expenses tax deductions are itemized deductions and can be taken by anyone. Even better, self-employed workers can take both deductions if they qualify.
This deduction is commonly referred to as the "pass-through deduction" or "qualified business income" (QBI) deduction. Pass-through business owners who qualify can deduct up to 20% of their net business income from their income taxes, reducing their effective income tax rate by 20%.
Some of the most common federal tax deductions include:
Mistakes to Avoid When Claiming the QBI Deduction
Specifically, passive investment income, capital gains, salary earned as a W-2 employee, wages from a C-Corp, capital gains, and income from foreign businesses do not qualify for QBI. Misclassifying them can lead to IRS penalties.
S Corporations: The S Corp must either provide phones as a working condition fringe benefit or reimburse employees for business use under an accountable plan.
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.
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.
If the owner does qualify, they can make an S-corp deduction with Form 10402. Under this method, S-corp owners can deduct premiums for accident, dental, long-term care policies, and health insurance policies.
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.
How can S corporations reduce their taxes?
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.
Give Yourself A Loan From the S Corp
At the end of the year, you and your accountant can decide if you should convert some of that loan to a distribution or leave it as a loan (you'll need to pay interest on the loan). If you borrow money from the corporation (via a loan), you're never going to have capital gains.