Year End Tax Tips for Your Single Owner Sub-Chapter S Corporation

December 9, 2011 by
Filed under: Small Business 

Snow Blower 2 Updated for 2013

Your read a lot of news stories about year-end tax tips, but you don’t see a lot of things specifically targeted at Sub-S Corporations, and there’s nothing out there for the single owner S Corporation. It’s kind of sad because most people with Sub-S Corps are set up that way for the tax advantage of the Sub-S, but then they miss out on other tax benefits that they would have had if they remained a sole proprietor. If you own a Sub-Chapter S Corporation, then you need to make sure that you maximize your deductions just as much as any other type of business. These tips are especially for you:

First, and most importantly, if you’ve got a profit this year, you want to make sure that you are paying yourself some type of payroll. This is one of the most common mistakes that S Corps make. The point of having an S Corp is to protect some of your income from self employment taxes. In order to do that, you need to pay yourself a salary. In the early years of a business, there’s often a loss and the salary isn’t important, but once the business is in the profit side, the owner should be paying a wage that is commensurate with what he’d be earning if he worked the same job for someone else. If you don’t do this, the IRS can come back and assess self-employment tax on 100% of your S corp profit. So that’s the first thing you want to handle.

Reimburse yourself for your employee expenses: Write yourself an expense report and have the S Corp write you a check. For example: let’s say you took a business trip for a convention and your travel expenses cost $1000. You paid it out of your own pocket because it was easier at the time and you just figured that you’d write it off later. Because you are an employee of the S corp, you would put the $1000 on your schedule A as an employee business expense and it would be subject to the 2% limitation rules (you can only deduct as an employee business expense what you spend over 2% of your adjusted gross income). Putting the expense on your schedule A gives you a much smaller tax benefit than if it’s on your S Corp return. If you pay Alternative Minimum Tax, you could get zero benefit from putting it on your schedule A.

Pay your health insurance through your S Corp: This is not the big deduction you would want it to be, but it’s better than nothing. As an employee of the S Corp, you can’t claim the self-employed health insurance deduction like you could as a sole proprietor. Your health insurance would go on your schedule A subject to a 7.5% limitation before anything could be deducted (for most people that’s a zero deduction.) If your S Corp pays your health insurance, then it comes to you as a taxable fringe benefit, but then you get to deduct the cost of your health insurance on page 1 of your tax return—a much better place to put a deduction. You do not pay FICA on your health insurance.    (Yes, I realize that this sounds like a cockamamie way to do the accounting for your health insurance–but those are the IRS rules.  ‘Nuf said, right? )

Reimburse yourself for your home office deduction: It’s hard to claim a home office deduction on a Sub-S corporation. Like other employee expenses, it would go on your Schedule A and be subject to the 2% limitation rules like any other employee business expense. Many accountants won’t even touch a home office for a Sub-S Corporation. Some people charge rent to their S Corps for their home office, but that’s just moving your income from one taxable entity to another so you don’t really save anything. What you want to do is reimburse yourself for your home office deduction in a fully accountable plan. That’s a phrase that you want to remember: fully accountable plan. Prepare a form 8829 Home Office form like you were doing it for a sole proprietorship. Use that report to determine how much you should reimburse yourself for your home office. Remember, it’s a reimbursement, not a rent payment. It reduces taxable income to the company, but it is not taxable to you because you have “accounted” for the expenses. For more information about home office deductions, you might want to read this post: http://robergtaxsolutions.com/2011/07/how-to-boost-your-home-office-deduction/

I’ve listed some other year end tax tips in my other blog post: 2011 Year End Tax Tips for Tiny Business Owners. Not all of the tips there work for Sub S corporations, but some of them do so it’s worth checking out.

Comments

2 Comments on Year End Tax Tips for Your Single Owner Sub-Chapter S Corporation

  1. Doug A on Sat, 23rd Mar 2013 8:56 pm
  2. “If your S Corp pays your health insurance, then it comes to you as a taxable fringe benefit so you still have to pay FICA on it”

    Are you sure about that?

    “Reimburse yourself for your home office deduction”

    Can you cite the statute, case law, or IRS source which leads you to believe this is acceptable?

  3. Jan Roberg on Mon, 10th Jun 2013 9:31 pm
  4. Hi Doug,
    You don’t pay FICA on your health insurance with an S Corp but you do pay income tax. Here’s the link: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues

    when I looked at the post, I saw the mistake and fixed it. I’m sorry, that was an old post.

    About claiming your home office deduction as an employee reimbursement–the authorization to reimburse an employee is IRS regulation section 1.62-2(d)(1)–that allows the reimburbes the expenses in part VI, subchapter B, chapter 1 of the IRC. This is that part that includes business expenses, depreciation, interest and taxes.

    So, you, as the employee submit an expense report to your employer, the corporation, for the home office expenses. You must have an accountable plan, you must really incur the expenses, and you must substantiate the expenses. Hope that helps.

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