Tax Planning for S-Corp Owners

Tax planning is the process of organizing financial affairs in a way that legally minimizes tax liabilities while ensuring compliance with all applicable laws. For S-corporations (S-corps) —which are pass-through entities under Subchapter S of the Internal Revenue Code— tax planning is essential to avoid overpaying taxes, maximize deductions, and reduce audit risk.

This article provides a technical overview of tax planning and outlines best practices specifically tailored for S-corporation owners, shareholders, and tax professionals.

Write to Tax@S-CorpTax.com, or call (858) 779-4125.

1. Pay Reasonable Compensation to Shareholder-Employees

The IRS requires shareholder-employees to receive a reasonable salary before taking profit distributions. Salaries are subject to payroll taxes, while distributions are not.

Best Practices:

• Conduct a market analysis to determine fair compensation based on industry, duties, and region.

• Document the salary rationale in corporate records for audit protection.

• Balance salary and distributions strategically.
  Example: If your S-Corp earns $200,000, a $60,000 salary and $140,000 in distributions may be defensible and tax-efficient.

2. Maximize Deductions and Credits

S-Corps may claim a wide range of deductions:

• Business expenses: Rent, marketing, office supplies.

• Home office deduction: If space is used exclusively for business.

• Vehicle expenses: Mileage or actual cost.

• Retirement contributions: SEP-IRA, Solo 401(k).

• Health insurance premiums: Under qualifying conditions.

Best Practices:

• Use accounting software to track expenses.

• Work with a tax professional to apply complex deductions like the QBI deduction (up to 20% of qualified business income).

• Monitor available credits, including the Work Opportunity Tax Credit and R&D Tax Credit.

3. Time Income and Expenses Strategically

Strategic timing helps manage taxable income.

Best Practices:

• Defer income: Push invoices into next year if income is expected to rise.

• Accelerate expenses: Pay deductible costs before year-end.

• Use cash basis accounting: Allows better timing control.

Example: Expecting $300,000 revenue in 2025 and $400,000 in 2026? Defer $50,000 in income to January 2026 to reduce 2025 taxes.

4. Leverage Retirement Plans for Tax Savings

S-Corps can set up powerful tax-deferred retirement plans:

• SEP-IRA: Up to 25% of compensation or $69,000 (2025).

• Solo 401(k): Up to $69,000 + $7,500 catch-up (age 50+).

• SIMPLE IRA: Easier administration, lower limits.

Best Practices:

• Select the right plan with help from a financial advisor.

• Max out contributions to lower current taxable income.

• Follow IRS rules, especially when you have employees.

5. Optimize Health Insurance and Fringe Benefits

Health premiums for shareholders, spouses, and dependents may be deductible if paid or reimbursed by the S-Corp.

Best Practices:

• Use an Accountable Plan to reimburse employee expenses tax-free.

• Set up HSAs with high-deductible plans for triple tax benefits.

• Ensure health premiums are added to the W-2 and deducted properly.

6. Maintain Accurate Records and Work with a Tax Professional

Recordkeeping is essential to support deductions and stay audit-ready.

Best Practices:

• Use cloud-based software for real-time tracking of income, expenses, and payroll.

• Retain receipts, invoices, and statements for 3–7 years.

• Engage an Enrolled Agent with S-Corp expertise to review filings and identify savings.

7. Plan for State-Specific Taxes

Some states impose additional taxes on S-Corps. For instance, California has a 1.5% net income tax (minimum $800).

Best Practices:

• Research your state’s S-Corp tax rules.

• Integrate state taxes into your broader planning.

• Consult a local tax advisor for compliance.

8. Stay Informed About Tax Law Changes

Tax law changes may affect S-Corp strategy, including updates to QBI deductions, retirement limits, or payroll thresholds.

Best Practices:

• Subscribe to IRS updates and credible tax sources.

• Attend tax-related webinars and briefings.

• Revisit your tax strategy with a CPA annually.