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Level 1

(S) Corporation Taxes: What Can Be Counted as a Business Expense?

I recently filed articles of incorporation for a business of which I will be the sole shareholder. I intend to designate this business as an S-Corp. 

I have two questions about what to expect when next year's taxes roll around: 

(1) Do you know, or can you point me to resources explaining, the types of expenses that a corporation can deduct? I know that at a Sole Prop, my business expenses must be "necessary and ordinary." Is the same standard true for a corporation, or are its expenses business expenses by nature?

(2) When it comes time to tell the IRS about the company's business expenses, does the process look similar to that of a Sole Prop, in which I list out each individual line item along with the amount? Or will I use some other manner of reporting this? 

Thank you! 

1 Best answer

Accepted Solutions
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Employee Tax Expert

(S) Corporation Taxes: What Can Be Counted as a Business Expense?

If you are going the S Corp route, make sure that you pay yourself a reasonable salary. It is very important and a red flag when Officer Compensation doesn't show up on the return. You can run your health insurance, HSA, or certain retirement contributions through payroll. You might need professional help to calculate the reasonable salary, but the general idea is to pay yourself at least what other businesses pay for similar services that you provide to the corporation. 

 

To answer your questions:

 

1) It is the same idea. Expenses need to be "necessary and ordinary". The company can reimburse you for business mileage. It can reimburse you for the usage of the home office. 

 

2) And yes, the process is similar. You will need TurboTax Business software to report it. It will list different types of expenses and you can add your own descriptions as well. 

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5 Replies
Highlighted
Employee Tax Expert

(S) Corporation Taxes: What Can Be Counted as a Business Expense?

If you are going the S Corp route, make sure that you pay yourself a reasonable salary. It is very important and a red flag when Officer Compensation doesn't show up on the return. You can run your health insurance, HSA, or certain retirement contributions through payroll. You might need professional help to calculate the reasonable salary, but the general idea is to pay yourself at least what other businesses pay for similar services that you provide to the corporation. 

 

To answer your questions:

 

1) It is the same idea. Expenses need to be "necessary and ordinary". The company can reimburse you for business mileage. It can reimburse you for the usage of the home office. 

 

2) And yes, the process is similar. You will need TurboTax Business software to report it. It will list different types of expenses and you can add your own descriptions as well. 

View solution in original post

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Level 10

(S) Corporation Taxes: What Can Be Counted as a Business Expense?

You REALLY need to be consulting with and going to a tax professional for AT LEAST the first year of a corporation.  Many things need to be done differently and a good tax professional can help you with that.

 

As a side note, what made you decide that an S-corporation is the best way to be taxed?  Again, I HIGHLY recommend going to a good tax professional to determine if that is the best way to be taxed or not.  And be aware that there is additional paperwork/record-keeping and additional expenses for a corporation (such as being on payroll).

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Level 1

(S) Corporation Taxes: What Can Be Counted as a Business Expense?

@KristinaK: Thank you for the clear, helpful answer. I sincerely appreciate it. 

@AmeliesUncle: Thanks for the advice. If taxation were the only consideration, I would probably not be going this route. Fortunately, I anticipate this business being very small for the time being — it will by no means be my primary source of income. 

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Level 10

(S) Corporation Taxes: What Can Be Counted as a Business Expense?


@NewCorpWow wrote:


@AmeliesUncle: Thanks for the advice. If taxation were the only consideration, I would probably not be going this route. Fortunately, I anticipate this business being very small for the time being 


 

It makes even less sense to be taxed as as corporation if the business is very small. 

 

You said taxation is not the only consideration, but depending on what the other factors are, there are likely other alternatives that would be easier and likely cheaper then having a corporation.

 

Again, consulting with a professional, either tax professional and/or business attorney, is highly recommended.

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Level 1

(S) Corporation Taxes: What Can Be Counted as a Business Expense?

@AmeliesUncle: Can you provide any more actionable insights into your advice? If I own an s-corp that brings is $500 of revenue and have $700 in expenses, that net loss of $200 will be passed through to me. The same is true of the converse: a $200 profit would be pass through to me. In either case, I will pay taxes on that income at my individual rate. So what are the scenarios in which this might be a negative approach? 

I can't go into the specific reasons why I want to own a corporation. But for the sake of this convo, let's just assume that there are no other options.

Like, if you had to list the top three potential negative aspects of owning a corporation, what would they be?