14 Important Tax Strategies for S Corp Owners
Smart tax strategies can lower your S corporation’s taxes and streamline financial management. From maximizing deductions and leveraging retirement contributions to hiring family members, these tactics are key to saving money and boosting your bottom line.
Proactive tax planning ensures compliance and positions your business for future growth. Working with a tax professional helps uncover opportunities to reduce tax liability and keep your business financially strong.
1. Pay Yourself a Reasonable Salary
S corporation owners must pay themselves a salary subject to payroll taxes, which also reduces the corporation's taxable income. Any additional profits distributed to owners are not subject to payroll taxes. This is one of the primary benefits of an S corp.
The IRS requires reasonable compensation to be paid to prevent underpayment of payroll taxes which can lead to income reclassification and subsequent penalties. A tax professional can determine a reasonable salary for an S corp owner based on earnings, profits, your role or job responsibilities, and industry averages. Setting the right salary helps you avoid IRS scrutiny and optimizes your tax savings.
2. Claim the Qualified Business Income Deduction
The Qualified Business Income (QBI) deduction under Section 199A allows eligible S corporations to deduct up to 20% of their pass-through income. This deduction reduces taxable income and can lower both federal and state taxes.
Not every business qualifies, and the deduction may be limited based on income level, industry type, and wages paid. For high-earning S corporations, the deduction is often capped at 50% of W-2 wages. A tax professional can determine the right balance between salary and distributions to maximize this deduction while maintaining compliance.
3. Deduct All Eligible Business Expenses
S corporations can deduct a wide range of eligible business expenses, including travel, vehicle costs, office supplies, materials, cell phone bills, and business trips. These deductions lower your S corporation’s taxable income and reduce your overall tax bill.
Example: Subscriptions to industry-related publications or online tools like accounting software are fully deductible and reduce your tax bill while keeping your business running efficiently.
Keeping organized records ensures these deductions hold up under IRS scrutiny. Understanding different business expense tax categories helps you identify all deductible costs. For a quick reference, download our free Business Tax Deduction Cheat Sheet to ensure you are not missing out on valuable deductions.
4. Deduct Home Office Expenses
S corp owners who work from home can deduct a portion of home-related expenses, reducing their taxable income. The space must be used solely for business purposes to qualify.
Eligible deductions include a percentage of your mortgage interest or rent, utilities, internet, insurance, and maintenance costs. Office supplies, equipment repairs, and software subscriptions may also qualify. Accurate records are essential as the IRS requires clear documentation.
5. Maximize Depreciation Deductions
Depreciation deductions allow S corporations to deduct the cost of business assets like equipment, vehicles, and property over time, reducing taxable income for the S corp.
Leverage Section 179 Expensing
Section 179 allows S corporations to deduct the full purchase price of qualifying equipment and software in the year it is placed in service, rather than depreciating the cost over several years. This bonus depreciation is ideal for businesses making significant investments in machinery, technology, or vehicles.
Example: If your S corp purchases $50,000 worth of office equipment, you can deduct the entire amount in the same tax year. This strategy encourages reinvestment in the business while providing immediate tax relief.
6. Deduct Professional Service Fees
S corporations can deduct professional service fees, including the cost of hiring lawyers, accounting professionals, and consultants. These services are crucial for maintaining compliance, optimizing financial strategies, and navigating complex tax rules.
Tax planning services, in particular, help identify deductions, credits, and strategies that maximize savings and minimize tax liabilities for your S corp. Additionally, tax preparation and filing fees are deductible—ensuring accurate and timely tax filing and reducing the risk of costly mistakes.
Schedule a 15-minute discovery call to see how our tax professionals can save your S corp money at tax time.
7. Hire Family Members
While there is no specific tax deduction for employing your family members, their wages are deductible business expenses. You can also offer untaxed benefits—such as health coverage, educational fees, or other fringe benefits—that reduce your tax burden without increasing their taxable income. This strategy lowers your taxable income while providing meaningful compensation through benefits.
Example: You own a house construction business in Jacksonville, Florida, and hire your daughter to manage social media, boosting local brand awareness. Her wages are tax-deductible, and a company-provided cell phone is also deductible while remaining untaxed for her. Ensure her pay is market-rate and her duties are documented to meet IRS requirements.
8. Claim Research and Development Tax Credits
S corporations that invest in developing new products, improving processes, or enhancing technology may qualify for R&D tax credits. Qualified research expenses include prototype development, software improvements, or refining manufacturing techniques.
The R&D tax credit directly lowers your S corporation's federal income taxes, so do not overlook this important credit. It is essential to maintain proper documentation to claim these credits.
9. Leverage State-Specific Tax Credits
In addition to federal incentives, many states offer tax credits that can lower your S corporation’s state and local taxes. Tax incentives vary by state, so it is essential to check your state’s available credits.
Example: Florida offers corporate tax credits like the Florida Research and Development (R&D) Tax Credit for businesses investing in innovation (similar to the federal R&D Tax Credit described above). The Capital Investment Tax Credit (CITC) is another Florida tax credit for large investments in facilities or equipment.
10. Offer Owner-Employee Health Insurance Reimbursements
If an owner-employee holds more than 2% of the company, the S corp can reimburse health insurance premiums and deduct them as a business expense. While the premiums are included in the owner’s taxable W-2 income, the owner can claim a self-employed health insurance deduction on their personal return, reducing their adjusted gross income. This setup lowers the company’s tax liability without triggering penalties under the 21st Century Cures Act.
11. Create an Accountable Plan for Employee Reimbursements
An accountable plan lets S corporations reimburse employees for business-related expenses without counting them as taxable income. These reimbursements are fully deductible for the business and reduce flow-through taxes.
To qualify, the plan must meet three IRS requirements:
Expenses must have a clear business purpose.
Employees must provide proper documentation, like receipts and explanations.
Any excess reimbursement must be returned promptly.
12. Contribute to Tax-Deductible Retirement Plans
S corps can lower flow-through taxes by contributing to retirement plans like a 401(k), SEP IRA, or SIMPLE IRA for both owners and employees. These employer contributions are tax-deductible business expenses, reducing the company’s taxable income and overall tax bill.
Example: If your S corp contributes $10,000 to an employee’s SEP IRA, that amount reduces your S corporation’s taxable income for the year. This offers immediate savings while supporting employee retention.
Shareholder-employees and staff can also defer part of their salaries into retirement accounts, cutting their W-2 income and decreasing flow-through taxes. This strategy not only supports long-term savings for everyone but also offers immediate tax benefits for the business.
13. Rent Your Personal Residence to Your S Corp
S corp owners can rent their home to the business for up to 14 days annually. The company deducts the rental expense, and the owner receives tax-free income. To qualify, set a fair market rate and maintain formal documentation, including a lease, attendee list, and invoices.
Example: You could host a quarterly one-day board meeting at your home and charge the business $1,000 per event. That’s $4,000 of tax-free income annually for you and a $4,000 tax deduction for your S corp.
14. File Annual Tax Returns on Time
Filing your annual tax returns on time is critical for S corporations. Returns must be filed by the 15th day of the third month after the end of the tax year to avoid penalties.
Timely filing ensures that all eligible business deductions, like bonus depreciation and travel expenses, are applied correctly and accepted by the IRS. This step helps prevent costly mistakes that could increase your tax liability. A tax professional can help ensure your return is accurate and complete.
Optimize Your S Corporation’s Tax Strategies
Proactively applying these tax strategies allows S corps to optimize business expenses, deductions, and credits and reduce pass-through taxes. Regular tax planning with expert guidance ensures compliance while positioning your business for sustainable growth. Professional advice is essential for uncovering hidden tax-saving opportunities for savings in both the short and long term.
Are you an S corp owner looking to deepen your understanding of tax strategies and ensure you are making the most of every opportunity? Our DIY Business Success membership offers invaluable resources and expert insights, including video training and monthly Q&A sessions to help you navigate the complexities of tax season and beyond.
