10 Ways you Can Reduce Your Taxes if you are taxed as an S Corp

The S corp. designation refers to the way a business has chosen to be taxed under the Internal Revenue Code. If your business profits are greater than what the IRS considers a reasonable salary, then  S corp. taxation may save you money. You can elect LLC S corp. status at any time during the tax year prior to the year you want the election to take effect, or during the first two and a half months of the current year. New businesses have approximately 75 days to elect a different tax status. If you are S corporation owner you should be aware of all the tax breaks that  you are entitled to.

The following are TEN Ways you can reduce your S Corp Taxes (from the Bradford Tax institute):

1) Reduce S Corporation Owner’s Wages

As the owner of an S corporation, you can legitimately cut payroll taxes by thousands of dollars by paying yourself a lower salary and taking the rest of your income as distributions. However, you need to make sure that you don’t drop your salary below what the IRS considers “reasonable compensation.”

2) S Corporation Covers the Owner’s Health Insurance Premiums

The S corporation can establish a health insurance plan for the owner-employee who owns more than 2 percent in one of two ways: 1) the S corporation pays the premiums for the owner-employee and family, or 2) the S corporation reimburses the owner-employee for the premiums.

3)Employ Your Child

The S corporation owner must pay payroll taxes on the child’s wages, but the family enjoys a decrease in income taxes. Each child can earn up to $12,000 without paying any federal income taxes.

4) Sell Your Home to Your S Corporation Before Converting It to a Rental Property

If you plan to convert your personal residence into a rental property, consider first selling the home to your S corporation. You can avoid taxes on the sale with the homesale exclusion of $250,000 gain ($500,000 if married). Additionally, you increase the rental property’s depreciable basis, which provides for greater depreciation deductions.

5) Reimbursement of Home-Office Expenses

When the S corporation reimburses the owner for home-office expenses, this reimbursement is a deduction for the S corporation and tax-free income to the owner.

6) Rent Your Home to Your S Corporation

An S corporation owner can rent his or her entire home to the S corporation for up to 14 days per year and get big tax deductions. The S corporation deducts the full amount of the rent, and the owner realizes the income completely free of income tax.

7) Reimbursement of Depreciation Expenses

The S corporation can reimburse the S corporation owner for depreciation expenses (as well as Section 179 expenses) related to business use of a vehicle, a home office, and other assets. This is a deduction for the S corporation and tax-free income for the owner.

8) Reimbursement of Vehicle Expenses

A qualifying “heavy” vehicle used for business can produce a substantial Section 179 first-year depreciation deduction. Plus, if your home office qualifies as a principal place of business, business-related trips to and from that home office rack up business miles.

9) Reimbursement of Travel Expenses

An S corporation owner who incurs business-related travel expenses must submit an expense report and be reimbursed by the S corporation; other arrangements have disastrous tax consequences.

10) Cell Phone Expenses

When an S corporation provides an employee with a smartphone or similar telecommunications equipment primarily for non-compensatory business reasons, this is considered a working condition fringe benefit that is excludable from income. The S corporation can reimburse the employee for the full cost of the phone expenses (including the personal use) and deduct this amount on the corporate tax return. The reimbursement is tax-free income to the employee.