Overview

S corporation owners can optimize taxes and build long‑term wealth by tuning reasonable W‑2 compensation, using tax‑efficient employee benefits (including accountable plans and properly structured fringe benefits for >2% shareholders), maximizing deductible retirement contributions, accelerating deductions with §179 and MACRS bonus depreciation, structuring income recognition (e.g., installment sales), and ensuring losses are deductible through basis/at‑risk/passive loss tracking. The points below include citations to IRS and Treasury sources you can use to implement these strategies correctly. S corporations; § 199A; Publication 463; Publication 5137; Publication 946; Publication 587

1) Calibrate reasonable W‑2 compensation to optimize payroll tax and §199A

Corporate officers are employees and must be paid “reasonable” compensation for services; underpaying risks reclassification and employment tax assessments, while overpaying can increase payroll taxes and reduce §199A benefits by inflating wages where wage/property limits apply. Reasonable compensation expectations for S corporation officers and the need to treat compensation as wages are summarized in IRS guidance. S corporations

For §199A, the deduction is generally 20% of qualified business income (QBI), subject to taxable income limits and, above certain thresholds, wage and qualified property limits and special rules for specified service trades or businesses (SSTBs). Planning levers include managing taxable income to stay within threshold/phase‑in ranges, and, when permitted, aggregating non‑SSTB trades or businesses to blend W‑2 wages and qualified property for a larger deduction. Use the regulations and definitions to determine QBI, SSTB status, aggregation eligibility, and wage/property limitations. § 199A; 26 CFR § 1.199A-1 (see operational rules cross‑references); 26 CFR § 1.199A-3

If you need to calculate “W‑2 wages” for the §199A wage limitation, use the IRS methods in Rev. Proc. 2019‑11 (unmodified box method, modified Box 1 method, or tracking wages method), and then determine the portion properly allocable to QBI. Rev. Proc. 2019‑11

2) Use accountable plans to reimburse expenses tax‑free

Adopt a written accountable plan to reimburse substantiated business expenses (for example, travel, meals within limits, mileage, and qualified home‑office costs under corporate policy). Under an accountable plan, reimbursements meeting substantiation and timely return‑of‑excess rules are excluded from wages and employment taxes; nonaccountable allowances are taxable wages. Per diem and mileage rules and special accounting periods can simplify administration. Publication 5137; Publication 463

3) Health benefit strategies for small employers and >2% shareholders

Many fringe benefit exclusions do not apply to >2% S corporation shareholder‑employees. Employer‑paid health insurance premiums for >2% shareholders must be included in Form W‑2, Box 1 (generally not Boxes 3 and 5), which can allow the owner to claim the self‑employed health insurance deduction if otherwise eligible. Coordinate benefit designs accordingly. S corporations; Publication 5137

A Qualified Small Employer HRA (QSEHRA) or an Individual Coverage HRA (ICHRA) can reimburse individual market premiums and medical expenses tax‑free if plan rules are satisfied. Coordinate with the premium tax credit (PTC), affordability, and reporting rules in Publication 974. Publication 974

For education benefits, a written Section 127 educational assistance program can exclude up to $5,250 per year for tuition, fees, books, and (through 2025) certain student loan payments, subject to nondiscrimination and other requirements. IRS FAQ—Educational Assistance Programs

4) Maximize retirement deductions

Employer retirement plan contributions are deductible when made on or before the corporation’s return due date (including extensions) if treated as made on the last day of the plan year per the governing deduction rules (applies broadly via §404 timing). Coordinate corporate deduction timing with plan funding and filing obligations. 2024 Instructions for Form 1120; Publication 542

Solo 401(k) and SEP IRA remain practical small‑employer options; defined benefit/cash balance plans can allow larger deductible contributions but require actuarial compliance and Form 5500 filings. Use the corporate publications and instructions to align timing and reporting. Publication 542

5) Accelerate deductions: §179, bonus depreciation, and MACRS

Section 179 allows immediate expensing of qualifying property (including certain nonresidential real property improvements such as roofs, HVAC, fire protection, and security systems); apply annual dollar limits and SUV/vehicle caps, and coordinate with bonus depreciation. Publication 946; 2024 Instructions for Form 4562

Bonus depreciation under §168(k) (phasing down by law) and MACRS can significantly accelerate cost recovery for qualifying assets. Track listed property rules, vehicle limits, and documentation. Claim depreciation and §179 on Form 4562. Publication 946; Publication 463; Form 4562

6) Structure transactions to manage income recognition

Installment sales can spread gain across years to smooth taxable income and §199A effects. Use Form 6252 and follow Publication 537 and Topic 705 for installment reporting mechanics, optional election out, and ordinary income recapture considerations. Form 6252; Publication 537; Topic No. 705

Coordinate timing of income and deductions (for example, retirement contributions deductible by the corporate due date, depreciation elections) to remain within §199A thresholds and maximize deductions. § 199A; Publication 946

7) Ensure losses are deductible: basis, at‑risk, passive, and NOLs

• Stock and debt basis: Shareholders must have sufficient stock and/or bona fide debt basis to deduct pass‑through losses; track basis annually and use Form 7203 as applicable. Nondividend distributions in excess of stock basis are capital gains. S corporation stock and debt basis

• At‑risk limits and passive activity rules: Losses are limited to amounts at risk; apply at‑risk and passive activity limitations (Form 6198 and Form 8582 for individuals) before claiming loss deductions; see Publication 925 for ordering and rules. Publication 925

• NOLs and excess business loss (EBL): Corporate NOL and individual excess business loss rules can limit current deductions; manage year‑end income and deductions to avoid trapping losses. See Publication 542 for corporate NOL rules and EBL references; confirm individual EBL limitations in §461(l). Publication 542; § 461

8) High‑signal, owner‑employee‑friendly tactics

• Accountable plan + home office reimbursement: The corporation can reimburse a pro‑rata portion of home expenses under an accountable plan (if the office meets exclusive and regular use tests). Reimbursements meeting accountable plan rules are excluded from wages and deductible by the corporation. Publication 587; Publication 463; Publication 5137

• Employer‑paid health insurance for >2% shareholders: Include premiums in Box 1 (not Boxes 3/5) on Form W‑2 to enable potential self‑employed health insurance deduction at the shareholder level (subject to eligibility and income). S corporations

• Retirement plan layering: Combining employer profit‑sharing (e.g., SEP or 401(k) employer contributions) with a cash balance plan can materially increase deductions when cash flow supports actuarial funding; align with corporate deduction timing on the return due date. Publication 542

9) Compliance guardrails

• Reasonable compensation: Document duties, time spent, and comps; pay reasonable W‑2 wages to owner‑employees to avoid employment tax exposure and improper distributions treated as compensation. S corporations

• §199A: Properly determine QBI, aggregation, and SSTB status, and apply wage/property limits; use regulations for reporting and computational details. § 199A; 26 CFR § 1.199A-1; 26 CFR § 1.199A-3; Rev. Proc. 2019‑11

• Fringe benefits and HRAs/QSEHRA/ICHRA: Apply owner limitations and nondiscrimination rules; coordinate with PTC and reporting. Publication 5137; Publication 974

• Depreciation: Coordinate §179 and bonus, track listed property and vehicle limits, and retain asset records; claim on Form 4562. Publication 946; Publication 463; Form 4562

• Losses: Track basis and at‑risk amounts; apply passive loss and EBL limits; file related forms (e.g., Form 6198, Form 7203) as required. S corporation stock and debt basis; Publication 925; § 461

Bottom line

For S‑corp owners, meaningful savings come from combining several levers—tuned W‑2 compensation to optimize §199A, tax‑efficient benefits via accountable plans and HRAs, strong but compliant retirement funding, and accelerated deductions with §179/MACRS bonus—while ensuring losses are actually deductible through basis/at‑risk/passive planning. Each strategy has strict rules and documentation requirements; implementing them with the cited IRS sources makes them powerful and audit‑resilient. § 199A; Publication 5137; Publication 974; Publication 946; Publication 463; Publication 587; Publication 542; Rev. Proc. 2019‑11