What Expenses Can An S-Corp Deduct? + FAQs

According to a 2021 QuickBooks survey, over 40% of small business owners overpaid taxes by missing eligible deductions, risking thousands of dollars in lost profit.

An S-Corp can deduct any ordinary and necessary business expense – from salaries and rent to supplies and travel – as long as it serves a legitimate business purpose. In this comprehensive guide, we’ll explore every S-Corp write-off, how to stay within IRS rules, and smart strategies to maximize your tax savings:

💼 Every ordinary and necessary expense your S-Corp can legally write off – We break down salaries, rent, equipment, travel, and more.
🚫 Costly mistakes and personal expenses to avoid – Learn what NOT to deduct to stay audit-proof and compliant.
🔍 Real-world examples of S-Corp deductions in action – See scenarios (home office, vehicle, health insurance) and how to handle them correctly.
⚖️ IRS rules, tax law evidence, and key forms – Understand legal backing, including IRC rules, IRS forms (1120S, K-1), and important terms.
🌎 Federal vs. state deduction differences – Navigate state-specific S-Corp taxes (like CA, NY, TX) and see how to maximize deductions in your state (with a handy chart).

✅ S-Corp Tax Deductions: The Direct Answer

S-Corporations can deduct virtually all the same business expenses as any other company, as long as the costs are ordinary and necessary for running the business. This means any expense common, accepted, and helpful in your trade is fair game as a tax write-off. Below is a detailed list of deductible S-Corp expenses, grouped by category:

Everyday Business Operating Costs

These are routine expenses needed to keep your S-Corp running day-to-day. They are 100% deductible:

Office Rent & Utilities: Rent for your office or workspace is fully deductible, as are utilities like electricity, water, heat, business phone, and internet service for the office. If you operate from a commercial space or co-working office, the fees are write-offs. (Home office costs are handled differently – see Home Office below.)

Office Supplies & Postage: Paper, ink, pens, shipping supplies, postage, and other consumable supplies used in your business are deductible. Even minor expenses (coffee for the break room, cleaning supplies) add up and can be written off.

Insurance Premiums: Premiums for business insurance (general liability, property insurance, errors & omissions, malpractice, etc.) are deductible expenses. If your S-Corp has a business owner’s policy (BOP) or any coverage protecting the business, you can write off the full cost.

Marketing & Advertising: Money spent on advertising, marketing, and promotion is fully deductible. This includes online ads, print ads, website costs, business cards, trade show fees, and promotional materials. Even the cost of developing your website or logo can be expensed.

Professional Fees: Fees paid to accountants, bookkeepers, attorneys, consultants, and other professionals hired for your business are deductible. For example, the cost of having a CPA prepare your S-Corp’s taxes or an attorney draft contracts is a business expense.

Repairs & Maintenance: Routine repairs and maintenance of business property or equipment are deductible. For instance, fixing a leaky office roof or servicing company computers counts as an expense (as long as it’s a repair, not a major improvement).

Licenses, Permits & Dues: Business licenses, industry permits, regulatory fees, and membership dues for professional organizations or chambers of commerce are deductible. If your S-Corp needs a state license or you pay annual LLC fees as part of maintaining S-Corp status, those costs are write-offs.

💡 Tip: Keep all receipts and invoices for operating expenses. Good record-keeping ensures you can substantiate these deductions if the IRS ever asks. Nearly 90% of entrepreneurs miss some write-offs simply due to poor record tracking – so save every receipt!

Employee Compensation and Benefits

If your S-Corp has employees – including you as an owner-employee – the money paid to them and their benefits are deductible:

Salaries and Wages: All forms of compensation to employees are deductible to the S-Corp. This includes hourly wages, salaried pay, overtime, bonuses, and commissions. For example, if your S-Corp pays you (the owner) a salary of $60,000 and your assistant $30,000, the entire $90,000 is a business expense that reduces taxable profit.

Payroll Taxes: The employer’s share of payroll taxes is deductible. Your S-Corp must pay Social Security and Medicare taxes (FICA) on employee wages (including your own salary), as well as federal and state unemployment taxes. These taxes – typically 7.65% of wages for FICA plus any unemployment insurance tax – can be written off as a business expense.

Employee Health Insurance: Premiums the S-Corp pays for employee health insurance plans are fully deductible. If you, as a >2% shareholder, have health insurance through the S-Corp, the company can deduct the premiums it pays on your behalf (with special tax handling explained in a scenario below). Dental, vision, life insurance, and other fringe benefits provided to employees are also generally deductible for the company, though special rules apply for owners (discussed later).

Retirement Plan Contributions: Contributions made by the S-Corp to employee retirement plans are deductible. For instance, if your S-Corp has a 401(k) plan or SEP IRA, any employer-matching or profit-sharing contributions to employees’ accounts (including your own, as an employee) are business write-offs. These reduce the company’s profit and thus the taxable income passed to you.

Workers’ Compensation Insurance: Premiums for workers’ comp are deductible business expenses. Many states require this insurance if you have employees, and the cost your S-Corp pays can be written off in full.

Other Employee Benefits: Employee education or training costs, childcare assistance, or any other fringe benefit provided can often be deducted. For example, if your S-Corp pays for an employee’s work-related course or reimburses tuition under an educational assistance program, that expense is deductible. Keep in mind, for owners with >2% shares, some benefits (like health insurance, HSA contributions, certain meals or lodging) are treated as taxable wages to you – but the S-Corp still gets to deduct them. We’ll clarify these special cases in the Legal Evidence section.

💡 Remember: If you’re an owner actively working in the S-Corp, you must pay yourself a reasonable salary for your role. The good news is that salary is deductible to the S-Corp. Paying yourself wages (instead of taking all profits as distributions) not only keeps the IRS happy, but it also increases deductible expenses (wages) for the company.

Business Travel and Meal Expenses

Travel costs for business purposes are deductible for an S-Corp, with some limits on meals:

Business Travel: When you or your employees travel for business, 100% of travel costs are deductible. This includes airfare, train or bus tickets, car rentals, Uber/taxi fares, hotel accommodations, lodging, and other travel expenses like baggage fees or conference fees. For example, if you fly to another state to meet a client or attend a work conference, your S-Corp can deduct the plane ticket, hotel bill, and even reasonable tips you give to bellhops or taxi drivers. Laundry and dry cleaning on a business trip, or business calls made from your hotel, are also deductible. The key is that the travel must be primarily for business. If there’s a personal vacation component, only the business portion is deductible.

Meals (50% Limit): The cost of business meals is generally 50% deductible. This includes meals while traveling for business and meals with clients or prospects where you discuss business. For instance, if you take a client out to dinner to discuss a project and spend $200, your S-Corp can write off $100 (50%). Similarly, if you attend a conference and buy lunch, 50% of that meal cost can be deducted. (Temporary Exception: In 2021-2022, the IRS allowed 100% deduction for restaurant-provided meals to help the hospitality industry, but as of 2025 we’re back to the 50% rule for most meals.) Always keep detailed receipts for meals and note the business purpose and who was present, as this documentation is required for meal deductions.)

Company Parties & Team Meals: If your S-Corp hosts an office party, annual picnic, or team-building meal for employees, those costs are generally 100% deductible (they fall under de minimis or employee benefit expenses, not the 50% limit). For example, throwing a holiday party for your staff or buying pizza for an all-hands meeting can be fully written off. Just ensure the event is primarily for the benefit of employees (not just shareholders).

No Entertainment Deduction: It’s important to note that entertainment expenses are NOT deductible. The tax law changed in 2018 to eliminate deductions for entertaining clients (e.g., sports tickets, concerts, golf outings), even if business is discussed. So, while a business dinner with a client is half deductible, taking that client to a baseball game is not deductible at all. Keep entertainment costs separate from meal expenses in your records. (One minor exception: if the ticket cost is part of a charitable sports event or a sponsorship package, a portion might be deductible as advertising or charity – but generally, assume entertainment is non-deductible.)

Vehicle and Transportation Expenses

Your S-Corp can deduct costs related to business use of vehicles, with careful allocation between personal and business use:

Company-Owned Vehicle: If the S-Corp owns a car, truck, or van used for business, the company can deduct all expenses for operating that vehicle – fuel, maintenance, repairs, insurance, registration, parking, tolls, etc. Depreciation of the vehicle’s purchase price is also deductible (see Equipment & Depreciation below for methods). Important: If there is any personal use of a company vehicle (e.g., you take the company car home at night or use it on weekends), that personal portion must be treated as a taxable fringe benefit to the employee using it. For instance, if an S-Corp-owned SUV is used 80% for business and 20% for personal trips by the owner, the S-Corp deducts 80% of the costs; the remaining 20% is not deducted but instead accounted for as personal use (and typically added to the owner’s W-2 income as a fringe benefit value).

Personal Vehicle Used for Business: Many S-Corp owners use their personal car for business errands, client meetings, or job sites. In this case, the S-Corp can reimburse you for the business use, and that reimbursement is deductible to the company (and tax-free to you if done under an accountable plan). There are two ways to calculate the deductible amount:
- Standard Mileage: The S-Corp reimburses a set rate per business mile driven (the IRS standard mileage rate – e.g., $0.655 per mile for 2023, and adjusted annually). You track your business miles and the company pays you that rate. The S-Corp deducts the total reimbursement. This method is simple and automatically factors in gas, wear-and-tear, insurance, etc.
- Actual Expense Method: The S-Corp reimburses a percentage of your actual vehicle expenses, proportional to the business use. You’d track what percent of total miles were for business (say 60%), and then the company can pay 60% of your actual gas, oil changes, repairs, insurance, lease payments, etc. The S-Corp deducts that reimbursement. This method requires more record-keeping and is often used if you have very high vehicle costs exceeding the standard rate.
Example: You drive 10,000 miles for business out of 15,000 total miles in a year (66.7% business use). If using the standard rate at $0.655, your S-Corp could reimburse you $6,550 (10,000 × $0.655) and deduct that. Alternatively, if your actual car expenses (fuel, maintenance, depreciation, etc.) totaled $12,000 for the year, the S-Corp could reimburse $8,004 (66.7% of $12k) and deduct that. Either way, you must keep a mileage log to substantiate the business use. Unreimbursed use of your personal car would not be deductible post-2017 (so set up that reimbursement plan!).

Local Transportation: Other local travel costs are deductible too. Parking fees, highway tolls, bus or subway fares, rideshares for business trips around town – your S-Corp can deduct these. For example, if you pay $20 for parking at a client’s office or $15 for an Uber to a meeting, those are business expenses. If you personally pay them, submit an expense report to have the S-Corp reimburse you (making it deductible to the corp, tax-free to you).

💡 Note: Commuting from your home to your regular business location is not deductible. The IRS considers daily commute costs personal. For S-Corp owners, this means you generally cannot have the company pay for your drive from home to the office (and the company shouldn’t deduct such costs). Deductions for vehicle use apply once you’re traveling away from your usual workplace or between business sites.

Home Office Expenses

Many S-Corp owners work from a home office. While home office deductions aren’t taken on an S-Corp’s own tax return directly, there is a way to get this benefit: through an accountable plan reimbursement or home-office rent arrangement:

Accountable Plan Reimbursement: Your S-Corp can establish an accountable plan to reimburse employees (including you) for business use of a home office. Under this plan, you’d calculate the pro-rata share of your home expenses that pertain to your dedicated home office space. This typically includes a portion of rent (or mortgage interest), utilities, homeowners’ insurance, property taxes, repairs, cleaning, and depreciation (for owned homes) proportional to the office’s square footage. You then submit an expense report to the S-Corp for that amount periodically. The S-Corp reimburses you for, say, 15% of your home expenses (if your office is 15% of your home’s area). That reimbursement is tax-free to you and fully deductible to the company. It’s a win–win: you effectively get a home office deduction via the S-Corp, and it doesn’t show up on your personal taxes.

Direct Rent Method: Alternatively, the S-Corp can pay you rent for use of your home office. For example, the company might have a written rental agreement to pay you $500/month for the office space. The S-Corp deducts this as rent expense. However, be careful: If you do this, you must report the rent income on your personal return (Schedule E), and you can only deduct expenses against that rental income in proportion (often ending up similar to the accountable plan result). The accountable plan approach is usually simpler and avoids having rent income on your return.

No Double-Dipping: As an S-Corp owner, you cannot take the home office deduction on your personal Form 1040 (that deduction (Form 8829) is for self-employed Schedule C filers or partners with special arrangements). For S-Corp owners, the only way to benefit is to run it through the company. If you fail to have the S-Corp reimburse or pay rent for your home office, you miss out on that deduction entirely. So it’s crucial to set this up properly if you qualify (regular and exclusive use of a space in your home for the business).

Equipment and Depreciation (Capital Expenses)

When your S-Corp buys equipment, machinery, technology, furniture, or other capital assets for the business, those are deductible too – though often over time through depreciation. Key points:

Depreciation: Large asset purchases (computers, office furniture, machinery, company vehicles, etc.) often must be depreciated – expensed over their useful life – rather than deducted all at once. For example, if your S-Corp buys a $5,000 computer system, its useful life might be 5 years, so normally you’d deduct $1,000 per year for 5 years. Depreciation spreads out the deduction but you do get the full cost deducted eventually. Your S-Corp will list depreciation expenses each year on Form 1120S.

Section 179 Expensing: Small businesses get a huge tax break via Section 179, which lets you deduct the full cost of qualifying business assets in the year of purchase (instead of depreciating over years). As of 2025, you can immediately expense up to $1,250,000 in equipment purchases per year under Section 179 (limited if total asset purchases exceed $2.7 million due to phase-out). This means most S-Corps can write off all their equipment investments right away. For instance, you buy $50,000 of new machinery – you could take a $50k deduction in the purchase year under Section 179. Note: Section 179 can be used for equipment, furniture, computers, software, and even qualified improvement property (improvements to non-residential real estate). Vehicles have special limits (luxury auto depreciation caps), but heavy SUVs and trucks over 6,000 lbs GVW often qualify for full 179 expensing too.

Bonus Depreciation: In addition to or instead of Section 179, tax law provides bonus depreciation for new (and used) business assets. Through 2022, bonus depreciation was 100% (full immediate write-off). It’s phasing down now: 80% in 2023, 60% in 2024, 40% in 2025, etc., unless Congress changes it. Bonus depreciation can be taken on assets with a life of 20 years or less. For example, if in 2025 you buy $100,000 of equipment and elect bonus depreciation, you could deduct 40% ($40,000) immediately and depreciate the rest normally. Section 179 and bonus are tools to accelerate deductions – your S-Corp can choose the optimal strategy each year.

Small Tools & Equipment: Items that are inexpensive (say < $2,500 each) can often be expensed immediately under the de minimis safe harbor for tangible property, rather than being depreciated. So, if your S-Corp buys a couple of tablets for $600 each, you don’t need to depreciate – you can just expense them outright as supplies or equipment costs.

Examples of Deductible Assets: Computers, servers, printers, office furniture, manufacturing machinery, company vehicles, software, and even building improvements (like renovating an office) can all yield deductions via depreciation or expensing. Keep a fixed asset ledger so you or your accountant can track these and claim the proper depreciation each year.

Interest and Taxes

Various interest payments and taxes your S-Corp pays are deductible:

Business Loan Interest: If your S-Corp has loans or lines of credit, the interest on those business debts is a deductible expense. This includes interest on bank loans, business credit cards, equipment financing, mortgage interest on business property, and interest on loans from shareholders (with proper documentation). For example, if the S-Corp pays $3,000 interest on a business bank loan this year, that $3,000 reduces taxable income. (Note: There is an earnings-based limit on business interest deductibility for larger companies (over $27 million revenue), but most S-Corps are small enough not to worry about that rule.)
Business Taxes & Licenses: Taxes incurred in operating the business are generally deductible. Key examples:
- Property Taxes: If the S-Corp owns real estate (e.g., an office building or land), the property taxes paid to local governments are deductible. Also, any personal property taxes on business assets (like an annual tax some states charge on business equipment or vehicles) can be written off.
- State Income and Franchise Taxes: Many states levy a minimum tax or franchise tax on S-Corporations. For instance, California charges an S-Corp a 1.5% franchise tax (minimum $800) on profits, and states like Illinois impose a 1.5% replacement tax on S-Corp income. These state-level corporate taxes are deductible expenses on the federal return (reducing the profit that flows to your K-1). If your S-Corp paid $1,000 to your state as an annual report fee or franchise tax, that’s a deductible expense. (We’ll cover specific state variations in a later section.)
- Payroll Taxes: As mentioned under compensation, the employer’s share of FICA and unemployment taxes on wages is deductible. Also, any state payroll taxes (like state unemployment insurance contributions) are deductible business taxes.
- Sales Tax (When Not Collected): If your business purchases items and pays sales tax (like on office supplies or equipment), the sales tax paid can be included as part of the deductible cost of the item. For instance, you buy a new computer for $1,080 (including $80 sales tax); you’d deduct $1,080 as the cost. Sales taxes that your S-Corp collects from customers and remits to the state are not an expense (they’re just trust funds), so not deductible – only taxes your business itself owes count as expenses.
Business Fees: Other government or regulatory fees (e.g., annual report filing fees, incorporation fees, regulatory permit fees, postage for tax filings) are deductible as ordinary business expenses. Even the cost of your S-Corp election filing (Form 2553) or any fees to your state to maintain the corporation are valid deductions.

(One type of tax that is not deductible is federal income tax – but since an S-Corp generally doesn’t pay federal income tax at the corporate level, this isn’t an issue. If your S-Corp pays on behalf of shareholders (e.g. in composite state returns or something), those would typically be accounted for separately, not as a deductible business expense.)

Startup and Organizational Costs

If your S-Corp is newly formed or in its first year, you likely incurred startup costs before the business was fully up and running. The IRS lets you deduct some of those upfront costs:

Startup Costs: These are expenses you paid to create or investigate the business before it was operating. They include things like market research, feasibility studies, writing a business plan, travel to secure suppliers or clients pre-opening, pre-opening advertising, costs to recruit and train initial staff, and professional fees for consultants during the startup phase. You can deduct up to $5,000 of startup costs immediately (if your total startup costs are $50k or less; beyond that, the $5k allowance phases out). Any remaining startup costs over $5k are amortized (deducted) in equal parts over 15 years.

Organizational Costs: These are the costs to form the corporation or partnership, such as legal fees for incorporation, state filing fees, the cost of bylaws or operating agreements, initial accounting setup fees, etc. For S-Corps, you can also deduct up to $5,000 of organizational costs immediately (with a similar phase-out if costs > $50k), and amortize the rest over 15 years. For example, if you spent $2,000 on attorney fees and state fees to incorporate and elect S-Corp, you can deduct that $2,000 fully in the first year.

Section 195 & 248: These are the tax code sections that allow the above deductions. Essentially, they treat the initial expenditures to create your business as capital investments that you’re allowed to partially expense upfront (the $5k/$5k) and then slowly deduct the rest. Be sure to make the election on the first return to claim these deductions – your tax professional will usually handle it in the 1120S filings.

If You Never Opened: Side note – if you spent money investigating a business and then never actually formed or opened the S-Corp, those costs might be considered personal losses (not deductible) or capital losses. But if you got to the point of creating the S-Corp and starting business, then the above rules apply.

Bad Debts (for Accrual Basis)

If your S-Corp sells on credit (sends invoices to clients) and uses accrual accounting, you might have income booked that never actually comes in. Bad debt expense is deductible to prevent taxing you on money you’ll never get:

Business Bad Debts: If you included an amount in income that later became uncollectible, you can write it off as a business bad debt. For example, your S-Corp billed a customer $5,000 for a project, counted it as income, but the customer went bankrupt and never paid. You can deduct that $5,000 as a bad debt expense, reducing your taxable income (because it was originally taxed or counted, and now is reversed).

When Not Applicable: If your S-Corp is on a cash-basis accounting method (many small S-Corps are), you only recognize income when received, so you wouldn’t have included that $5,000 in income to begin with – thus, no deduction is needed when it’s not paid (it simply never became income). Bad debt deductions mostly concern accrual-basis taxpayers.

What Qualifies: Only bona fide business debts that are actually worthless qualify. Document your collection efforts and why it’s a bad debt. Personal loans or shareholder loans gone bad usually are not business bad debts (they might be nonbusiness bad debts, which are treated differently on personal returns).

Other Write-offs: Related concept – if the S-Corp has to refund a client or cancel a sale, those adjustments can typically be deducted or netted against income as well. The goal is to not overstate taxable income on things not truly earned.

Charitable Contributions

Charitable donations made by an S-Corp are a special case: they are deductible, but not the way normal expenses are. Instead of reducing the S-Corp’s ordinary income, they are passed through to shareholders as a separately stated item:

Cash Donations: If your S-Corp gives money to a qualified charity, it can’t deduct it on the 1120S as an “expense” line item. Instead, the donation amount will appear on each shareholder’s Schedule K-1 (line for charitable contributions). The shareholders can then deduct it on their personal tax returns (Schedule A) if they itemize, subject to the usual charitable deduction limits (e.g., typically 60% of AGI for cash donations). The net effect is similar: you do get a deduction, just on the personal side. For instance, if your 100% owner S-Corp donated $1,000 to Red Cross, your K-1 will show $1,000 charitable contribution. You’d include that on your personal return as if you donated it, possibly reducing your personal taxes.

Donations of Goods/Property: Non-cash donations (property, inventory to a charity, pro bono services, etc.) are handled the same way – passed through to owners to deduct at their appraised value. Be sure to file Form 8283 at the personal level if non-cash donations are over certain thresholds.

Why This Matters: Charitable contributions don’t reduce the S-Corp’s ordinary business income (which is what might qualify for the 20% QBI deduction, etc.), they’re carved out separately. So, while yes, your S-Corp can be generous and you get tax benefit, just remember the deduction shows up on your own return. The S-Corp should still keep records and receipt acknowledgments for any contributions it makes, in case the IRS inquires via the shareholders.

Miscellaneous Write-Offs

A few other deductions worth noting that S-Corps commonly use:

Education and Training: If your S-Corp pays for work-related training, classes, seminars, or certifications for you or your employees, those costs are deductible. For example, paying for an online course to improve your professional skills or sending an employee to a workshop can be expensed. (Education must be to maintain or improve skills in the current business – not to train for a new career.)

Business Publications & Software: Subscriptions to industry journals, magazines, professional newsletters, or online services related to your business are deductible. The same goes for software subscriptions (e.g., Adobe Creative Cloud, accounting software fees) and SaaS tools your business uses.

Telephone & Internet: If you have a dedicated business phone line or business cell phone, those bills are fully deductible. If you use a personal phone partly for business, you should have the S-Corp reimburse the business-use percentage of the bill (similar to the car example). The cost of internet service is deductible to the extent it’s used for business (which, for an office line, could be 100%; for a home internet that’s shared, allocate a portion or run it through home office calc).

Business Gifts: Deduction for business gifts is limited to $25 per recipient per year. It’s a small cap, but if your S-Corp buys holiday gifts for clients (say $50 gift baskets), you can only write off $25 for each client. Promotional items with your logo that cost only a few dollars per person might not count towards the cap if distributed widely (they can be an advertising expense). Keep the $25 rule in mind for any significant gifts.

Advertising and Sponsorships: We touched on marketing – if you sponsor a local event or sports team and get advertising in return, that expense is deductible advertising. Just ensure you have an advertising/business motive (pure donations to a nonprofit go under charitable contributions instead).

Legal Settlements and Judgments: If your S-Corp has to pay out a legal settlement or court judgment related to the business, that payment is often deductible (except certain penalties or anything illegal). For instance, settling a breach of contract lawsuit or paying damages to a customer can usually be expensed as a business loss. Fines or penalties paid to government (for law violations) are not deductible (see next section on what to avoid).

As you can see, pretty much any expense related to running your S-Corp can be deducted in some form. The strategy is to run as many legitimate costs through the business as possible (instead of paying them out-of-pocket personally) so that your taxable income is minimized. Every deductible dollar means less income flowing through to your personal return, which means a lower tax bill for you. Next, we’ll cover some critical caveats – not everything that seems like a business expense is allowed.

🚫 What Not to Deduct: Pitfalls and Red Flags

While S-Corps enjoy broad deductions, there are clear lines you mustn’t cross. Deducting the wrong things can trigger IRS audits, penalties, or lost deductions. Here are major pitfalls to avoid:

🚫 Personal Expenses as Business Costs: Perhaps the #1 golden rule – never mix personal bills with your S-Corp’s deductions. The company cannot deduct personal living expenses like your rent or mortgage, groceries, personal travel, family meals, clothing, or entertainment that isn’t directly business-related. For example, you can’t have the S-Corp pay your personal electric bill or buy you a new suit and call it a write-off (unless it’s a required uniform or safety gear).
- The IRS scrutinizes small businesses for this. If an expense doesn’t have a clear business purpose, keep it out of the books. Even if you think an expense indirectly helps you “be in business” (like nice clothes or a personal car you occasionally use for work), it’s not deductible unless you follow proper reimbursement rules for the business portion.

🚫 Deducting 100% of Mixed-Use Assets: Be careful with items that have both business and personal use. You can only deduct the business portion. Common examples: vehicles, cell phones, internet service, and home office expenses. Don’t try to write off your entire cell phone or car if you also use it personally. Keep logs (mileage log, phone usage breakdown) to support the percentage you do deduct. Overstating business use (like claiming your personal SUV is “100% business” when it’s not) is a red flag. The IRS can disallow the deduction or impose penalties if you can’t substantiate it.

🚫 Commuting Costs: As mentioned, the daily commute from your home to your main workplace is personal, not a business expense. Do not deduct commuting mileage, gas, or train passes for your normal route to the office. Deductible travel starts only when you leave the office for a business trip or go to a temporary work location. Trying to write off commute costs (for yourself or employees) will likely be denied in an audit.

🚫 Entertainment and Club Dues: Client entertainment is not deductible since 2018. This means no write-off for taking clients to sports events, concerts, golfing, or other entertainment, even if business is discussed. Also, country club dues, social club memberships, or gym memberships – generally not deductible (unless explicitly for business networking and even then the tax law disallows most). Don’t categorize these as “dues & subscriptions” hoping to sneak them in; the IRS knows to look for those. Meals are only 50% deductible and must have a business context; pure entertainment is a no-go.

🚫 Fines and Penalties: Money your S-Corp pays for breaking the law or regulations cannot be deducted. This includes parking tickets, traffic fines, OSHA penalties, IRS fines, late fees for taxes, etc. For example, if your delivery truck gets a speeding ticket or your business is fined $1,000 for a regulatory violation, the S-Corp must pay it – but it can’t reduce taxable income for it. These are considered penalties, and Congress doesn’t reward bad behavior with a tax break.

🚫 Out-of-Pocket Expenses Not Reimbursed: If you (or any shareholder/employee) pay a business expense personally and fail to have the S-Corp reimburse you in a timely manner, you typically lose that deduction. Why? As an S-Corp owner, you’re technically an employee, and unreimbursed employee business expenses are not deductible on personal returns (they were eliminated as a deduction in 2018). For example, you buy $500 of office supplies with your personal card but never get paid back by the company – that $500 is just your personal expense now, not deducted anywhere. Avoid this by always submitting expenses to your S-Corp for reimbursement under an accountable plan. The company gets the deduction, you get your money back, and nothing goes on your personal taxes.

🚫 Excessive or Unreasonable Expenses: The IRS can disallow deductions that are clearly excessive or not reasonable for the business. For example, if your tiny S-Corp with $50k revenue claims a $40k “marketing conference” in Tahiti, that’s going to look suspect. Or if you deduct lavish personal perks (like a “company” sports car that’s rarely used for work). The expense has to make sense for your type of business and scale. Paying yourself or family members an exorbitant salary far above market rates to zero out profit could also be challenged (the IRS might deem the excess as nondeductible distributions). Always ask: Is this expense ordinary and necessary for my business, and is the amount reasonable? If not, don’t deduct the full amount.

🚫 Treating Distributions or Dividends as Expenses: Remember that shareholder distributions are not expenses. If your S-Corp pays you (the owner) a draw or distribution of profits, that’s after-tax profit sharing, not a salary or expense. Do not try to label owner draws as “consulting fees” or some expense category to reduce income. The IRS is keen on this point. You must run actual compensation through payroll (which is deductible). Any leftover profit you take out is a distribution – which is fine (and not taxed again on distribution), but you can’t deduct distributions. In short: pay yourself a fair wage, deduct that, but don’t expect a write-off for the rest of the profits you take home.

🚫 Failing to Document Business Purpose: For expenses like travel, meals, or anything potentially personal, failing to document who, what, when, where, and why can nullify your deduction. The IRS requires that you keep receipts for any expense of $75 or more (and technically for smaller ones too, though in practice they might not ask). For meals and entertainment (though entertainment isn’t deductible, if you try to claim any), you should note on the receipt or in a log who was present and the business discussion or purpose of the meeting. If you buy equipment, keep the invoice. If you reimburse your home office, keep calculations and utility bills. Lack of documentation = high risk of losing the deduction on audit, even if the expense itself was legitimate.

Staying clear of these pitfalls keeps your S-Corp’s deductions safe and legal. When in doubt, err on the side of caution or consult a tax professional. It’s better to miss a minor deduction than to overstep and face an audit or penalties for improper write-offs.

🔍 Real-World Examples of S-Corp Write-Offs

To see how all this works in practice, let’s look at a few common scenarios where S-Corp owners utilize deductions. These examples illustrate the right way to handle tricky situations like home offices, personal vehicles, and health insurance:

Scenario	How the Deduction Works (Proper Treatment)
1. Home Office Use (Owner works from a dedicated home office) 🏠	Accountable Plan Reimbursement: The owner calculates that 15% of their home is used exclusively for the S-Corp’s office. Each month, they submit an expense report for 15% of home expenses (rent or mortgage interest, utilities, insurance). The S-Corp reimburses that amount (say $300/month) and deducts it as “office rent/utilities.” The owner doesn’t pick up the reimbursement as income, and they don’t take a home office deduction on 1040 (since the company handled it). This way, the S-Corp effectively deducts the home office cost, tax-free to the owner.
2. Personal Vehicle for Business (Owner’s car used 10,000 miles for business of 15,000 total) 🚗	Mileage Reimbursement: The S-Corp uses the IRS standard mileage rate (for example, $0.655/mile). The owner tracks business trips and logs 10,000 miles for work. The company reimburses $6,550 (10,000 × $0.655). It records this as travel/auto expense and deducts it. The owner receives $6,550 tax-free (not in W-2, because under an accountable plan). Alternatively, if using actual expenses, the owner could calculate perhaps 66% of actual car costs and get that reimbursed. Either way, the business portion (and only the business portion) gets deducted. None of the personal driving is written off.
3. Health Insurance for Owner-Employee (>2% Shareholder) 💊	Deductible Premiums (with W-2 Reporting): The S-Corp pays $12,000 in health insurance premiums for the owner and their family. The company deducts $12,000 as insurance expense. Because the owner is >2% shareholder, the $12k is added to that owner’s W-2 as taxable wages (for income tax purposes only, not subject to Social Security/Medicare). The owner then takes a $12,000 self-employed health insurance deduction on their personal 1040, which in effect makes it non-taxable. Outcome: The S-Corp got a write-off, the owner ultimately pays no income tax on it (deduction cancels it out), and neither the owner nor company paid payroll tax on those premiums. This is the correct handling per IRS rules for S-Corp owner health benefits.

In each scenario above, the key is proper procedure:

The home office and vehicle expenses were handled via accountable plan reimbursements, making them deductible to the S-Corp and nontaxable to the individual. If the owner had not submitted those expenses, they’d lose the deductions entirely.
The health insurance was run through payroll correctly so that the company deducts it and the owner still gets a personal deduction. If instead the S-Corp tried to pay it under the table or the owner paid personally without company reimbursement, the owner might miss out on the deduction or violate tax rules.
Documentation was maintained: mileage logs for the car, expense reports and bills for the home office, and proper inclusion on the W-2 for insurance.

Real-World Example – Complete Picture: Let’s say Lisa is the 100% owner of DesignCo, an S-Corp. She operates from a home office (20% of her home), and sometimes meets clients at their sites. In 2025, DesignCo’s gross income is $120,000. Lisa does the following:

Pays herself a salary of $50,000 (deductible wage).
Has other business expenses: $5,000 on a new computer (she uses Section 179 to deduct full amount), $3,000 on software and subscriptions, $2,000 on marketing, $1,000 on supplies, $500 on client meals (50% of which, $250, is deductible).

Drives 8,000 miles for business (which she logs) out of 12,000 total. DesignCo reimburses her $8,000 × 0.655 = $5,240 for mileage (deductible).

Submits home office expenses totaling $6,000 for the year (20% of her home costs) to DesignCo. The company reimburses $6,000 (deductible).

Pays $10,000 for a health insurance policy for herself. The S-Corp pays it, deducts it, and reports that $10k on her W-2 (and she’ll deduct it personally).

Also, DesignCo contributes $5,000 to Lisa’s 401(k) as an employer match (deductible).
In total, Lisa’s S-Corp has $120,000 income minus wages ($50k) minus all those expenses and reimbursements (about $5k + $3k + $2k + $1k + $250 + $5.24k + $6k + $10k + $5k = $32.49k) = $37,510 taxable profit left. That $37.5k goes on her K-1 and onto her personal return, where it may also qualify for a 20% QBI deduction (~$7.5k off) and she deducts the health insurance $10k separately.

By appropriately funneling as many expenses as possible through the S-Corp (salary, retirement, reimbursements, etc.), Lisa kept the taxable profit low – meaning she pays far less tax overall than if she had not deducted those items. All of it is above-board because she followed the rules.

The lesson: use your S-Corp as the vehicle to pay for business costs properly, and you will reap the legal tax rewards. Next, we’ll ground these practices in the actual IRS rules and tax laws that authorize (and restrict) S-Corp deductions.

⚖️ Legal Evidence and IRS Guidelines for S-Corp Deductions

Every deduction your S-Corp takes must stand on solid legal ground. Fortunately, the tax code and IRS regulations provide plenty of support for legitimate business write-offs. Here’s a rundown of the legal pillars and relevant rules confirming what your S-Corp can deduct (and how):

“Ordinary and Necessary” — IRC §162: The cornerstone of business deductions is Internal Revenue Code Section 162(a), which states a business can deduct “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” “Ordinary” means common and accepted in your field; “necessary” means helpful and appropriate for the business (it need not be absolutely essential, just appropriate).
- This broad language is why S-Corps can deduct everything from office rent to paper clips. Courts have interpreted this generously — as long as you can show the expense is normal for your type of business and was incurred with the intent to benefit the business, §162 supports your deduction. Example: Paying for online advertising would clearly meet the ordinary/necessary test for a modern business, as would buying tools for a craft or paying a consulting fee for advice. On the flip side, if you tried to deduct an extravagant personal luxury as a “business” cost (like a yacht for a local plumbing business), the IRS would argue it’s not ordinary or necessary for that type of trade.

Capital vs. Expense — IRC §§263 and 168: Some legal provisions distinguish capital expenditures from immediate expenses. IRC §263 disallows deducting capital expenditures (like purchasing equipment or building improvements) all at once — instead, you capitalize them and recover via depreciation under rules like IRC §168. That’s why we have depreciation schedules. However, as noted earlier, IRC §179 and bonus depreciation (under §168(k)) carve out exceptions allowing immediate expensing. These code sections legally permit S-Corps to front-load deductions for investments in business assets, within limits. Congress created §179 specifically to spur small business growth by letting you deduct asset costs now (the law currently allows up to $1.25 million instant expensing, as mentioned).

Fringe Benefits & 2% Shareholder Rule — IRC §§ 3121 & 1372: Normally, a C-Corp can provide fringe benefits (like health insurance, life insurance, parking, etc.) to an employee tax-free, and the corporation still deducts the cost. For S-Corps, IRC §1372 says that for fringe benefit purposes, any S-Corp shareholder owning >2% is treated as if they were a partner in a partnership. In plain English, that means certain fringes cannot be tax-free for those owner-employees. The classic example is health insurance: as shown in the scenario, the S-Corp deducts the premium, but the >2% owner must include it as wages (and then can deduct it personally under §162(l) as self-employed health insurance).
- Similarly, life insurance premiums for >2% owners (for coverage over $50k) are taxable to them. The IRS explicitly outlines these rules in Publication 15-B and other guidance. So, the law allows the deduction to the company (yes, the S-Corp deducts the full premium under §162), but it prevents the owner from double-dipping by making it taxable income (then separately deductible). This is important legal evidence that if you follow the proper procedure (include in W-2, etc.), your S-Corp can deduct owner benefits.

Accountable Plan Regulations — Treas. Reg. §1.62-2: The IRS regulations define how an accountable plan works for expense reimbursements. Under these rules, if an employee (or owner-employee) substantiates expenses and returns any excess reimbursement, then the payments are not treated as taxable wages. The S-Corp can deduct the reimbursements, and the employee isn’t taxed on them.
- This is exactly why the home office and vehicle reimbursements in our scenarios are so powerful. The law backs it: as long as you have an accountable plan in place (a simple written plan and proper expense reports suffice), those reimbursements for business use of personal assets are legitimate deductions for the company.
- The IRS has, in audits, denied deductions where companies just gave per diem or auto allowances without requiring substantiation – those got reclassified as wages (taxable) and possibly lost the deduction if payroll taxes weren’t handled. So to be safe: always have receipts and clear reporting for any reimbursed expense. The law rewards that with a deduction and no income to the employee.

Substantiation Requirements — IRC §274(d): This section and its regulations impose strict record-keeping for certain expenses: notably travel, meals, entertainment, gifts, and listed property (like cars). It essentially says no deduction is allowed unless you substantiate the amount, time/place, business purpose, and business relationship of the expense with adequate records. This is a legal evidence that even a rightful expense can be lost if you don’t have proof.
- Tax court cases are full of examples where a business owner had a legitimate expense but lost the deduction because they failed to keep proper records or receipts. For instance, in Tax Court Memo 2017-184, an S-Corp owner’s vehicle expenses were disallowed largely due to lack of a mileage log and mixing of personal use. The court cited §274(d) – no substantiation, no deduction, period. So, compliance with these requirements is essential. That’s why we emphasize logs for vehicles and receipts for meals.

Case Law on Personal vs. Business Expenses: Tax courts have consistently drawn a hard line: personal living expenses are not deductible (IRC §262 explicitly says no deduction for personal, living, or family expenses). Many S-Corp deduction disputes that reach court involve the IRS asserting that certain expenses were personal. For example, in one case a couple ran an S-Corp and tried to deduct their child’s private school tuition as an “employee benefit” – the Tax Court struck it down as a nondeductible personal expense (nice try!).
- In another, an S-Corp owner deducted costs of his family vacation by claiming it was a shareholder meeting; the court, unsurprisingly, denied it since there was scant business purpose or documentation. These cases reinforce the principle: call a personal expense a business expense, and you’re in trouble. However, courts also uphold creative but legitimate strategies: e.g., if you do actually use part of your home for business and follow an accountable plan, courts have allowed those deductions (they’ve sided with taxpayers who properly documented a home office reimbursement).

Reasonable Compensation Enforcement: A unique legal issue for S-Corps is the IRS ensuring owners pay themselves a reasonable salary. While this is about income classification more than deduction, it’s worth noting legal outcomes: In the landmark David E. Watson P.C. case, an accountant’s S-Corp paid him only $24k salary on ~$200k profits. The court reclassified $91k of distributions as wages, hitting him with payroll taxes on that. The principle is that you can’t avoid payroll taxes by understating salary – the IRS can recharacterize and effectively force a “deduction” for wages you should have paid. How does this relate to deductions? If you don’t take a salary, your S-Corp’s profit is higher, but you’re not deducting a reasonable wage expense.
- The IRS in audits often says “you should have deducted a salary (and paid employment taxes on it) instead of taking all as profit.” So to stay safe, pay yourself a fair wage and take that deduction. It not only satisfies the law but also potentially lowers your overall taxes through the wage expense and compliance with QBI requirements (since S-Corp profit might get the 20% QBI deduction only if wages are paid in some cases).

IRS Publications and Rulings: The IRS issues Publications (like Pub 535 on Business Expenses, Pub 542 on Corporations, Pub 463 on Travel, etc.) and these are not law but are the IRS’s distilled guidance. For instance, Pub 535 explicitly lists categories of deductible expenses and those that are not (personal, fines, etc.), mirroring what we’ve covered. It’s evidence of how the IRS will treat things. The IRS also sometimes issues Private Letter Rulings or Chief Counsel Advice memos on specific S-Corp questions (like one confirming that certain state-level taxes are deductible by the S-Corp). While those aren’t broadly binding like law, they give insight into IRS interpretation.

Tax Code Updates and Sunset Provisions: Keep in mind, laws can change. For example, the 100% meals deduction for 2021-2022 was a temporary provision. Bonus depreciation’s 100% was temporary and is phasing out by law. Also, the Qualified Business Income (QBI) 20% deduction (IRC §199A) for S-Corp owners is slated to expire after 2025 unless extended. These are legal timelines to watch. Always double-check the current tax year rules or have a CPA update you on new tax legislation affecting deductions (like any new credits or limitations).

Bottom line: The ability for your S-Corp to deduct expenses is deeply rooted in the tax code. As long as you follow the rules – business purpose, proper classification, reasonable amounts, and documentation – the law is on your side. And if the IRS challenges a deduction, you can point to the relevant code section, regulation, or court precedent that backs you up. By adhering to these guidelines, you turn your S-Corp into a lean, tax-efficient machine fully in line with federal tax law.

📊 Federal vs. State: S-Corp Deductions and State Tax Variations

When it comes to deductions, federal tax law mainly governs what your S-Corp can deduct (and we’ve covered those extensively). However, state tax laws can affect S-Corps too – not so much in what expenses are deductible (states generally respect the federal definitions of income and deductions), but in how S-Corps are taxed at the state level and additional state-specific costs. Here’s what to know:

Most States Follow Federal Rules: For calculating S-Corp taxable income, most states start with federal income (which already accounts for all those deductions we discussed). So an ordinary business expense deductible federally is usually deductible for state income calculations too. You typically don’t have to maintain two sets of books.

State Recognition of S-Corp Status: Most states recognize S-Corporations and do not impose a regular corporate income tax on them (instead, shareholders pay state tax on the pass-through income). However, some states still levy entity-level taxes or fees on S-Corps. These are effectively the “cost of doing business” in that state. Unlike a partnership or sole prop, which might not face an entity tax, some states treat S-Corps specially.

Deduction of State Taxes on Federal Return: If your S-Corp pays a state-level tax, that payment is deductible on the federal S-Corp return as a business expense (usually categorized under taxes and licenses). This reduces the federal K-1 income passed to shareholders. In effect, the federal government gives you a slight break for state taxes paid (though indirectly the benefit might be limited by the SALT cap on personal returns, that cap doesn’t apply at the S-Corp level).

Let’s look at some state-by-state variations that S-Corp owners should be aware of:

State	S-Corp Tax Treatment & Deduction Implications
California 🐻	Imposes a 1.5% franchise tax on S-Corp net income (with a minimum annual fee of $800, regardless of profit). This is essentially a state income tax on the S-Corp. The S-Corp must pay it, and it deducts this tax on the federal return as a business expense. (Shareholders also pay CA personal income tax on the pass-through income, but a $800+ tax hit at the entity is unique to CA.) If your S-Corp loses money, you still owe the $800 minimum. Californians should factor this into cost of doing business – it doesn’t change what expenses are deductible, but it is an extra expense itself that you can write off federally.
New York (State & NYC) 🗽	New York State recognizes S-Corps and generally does not tax S-Corp income at the entity level (if all shareholders are individuals). Instead, S-Corps in NY pay a modest fixed dollar franchise fee based on gross receipts (ranging from $25 to $4,500). That fee is deductible federally. Importantly, New York City does NOT recognize S-Corp status. NYC S-Corps must pay the full corporate tax (8.85% General Corporation Tax) on income earned in the city. This NYC tax is a deductible expense on the federal (and NY State) returns. So if you do business in NYC, your S-Corp will face double taxation at the city level (corporate tax + shareholder tax on distributions), and you’d deduct the city tax on your federal return. NY State also introduced an elective Pass-Through Entity Tax (PTET): your S-Corp can choose to pay a state tax on its income (around 10% max rate) at the entity level, and then your personal NY tax is reduced via credit. The benefit is that the entity-level tax is deductible federally (bypassing the $10k SALT deduction cap on Schedule A). Many NY S-Corp owners opt into this to maximize deductions federally.
Illinois 🌽	Illinois treats S-Corps as pass-through for state income tax, but charges a Replacement Tax of 1.5% on S-Corp profits at the entity level. This is similar to a corporate tax albeit at a low rate. Your S-Corp will pay that 1.5% to Illinois; it’s deductible on the federal return (reducing K-1 income). Shareholders then pay Illinois personal income tax on the pass-through profit (currently 4.95%). Illinois essentially takes a small cut at the corporate level even for S-Corps. Be mindful when budgeting taxes – that replacement tax is an extra expense (albeit deductible) that for example a sole proprietorship wouldn’t directly pay (sole props just pay the 4.95% on profit).
Texas 🤠	Texas has no personal state income tax, and it doesn’t have a traditional corporate income tax either. Instead, it imposes a Franchise Tax (Margin Tax) on entities including S-Corps, if gross revenue exceeds $1.3 million (threshold as of recent years). The tax is about 0.375% of taxable margin (for most businesses) or 0.75% for others – effectively a small percentage of revenue or gross profit. If your S-Corp is small (under the threshold), you owe $0 to Texas. If larger, you pay this franchise tax. Any franchise tax paid is deductible as a business expense federally. So a Texas S-Corp benefits from no state income tax on owners, but may still have this modest entity tax to pay when big enough. (E.g., an S-Corp with $2 million revenue might pay around $7,500 in TX franchise tax, which would reduce federal taxable income by that amount.)
New Jersey 🗺️	New Jersey fully taxes S-Corp income unless you file a separate state S-Corp election. Once you do, NJ mostly treats you as pass-through, but they have a minimum corporation tax ($375 for small S-Corps, up to $2,000 for those with high gross receipts). That’s payable annually and deductible federally. Additionally, NJ (like NY) created an optional Business Alternative Income Tax (BAIT) – an entity-level tax S-Corps can elect to pay on income (at rates 5.675% to 10.9% depending on income). Shareholders then get a credit to avoid double taxation. BAIT is essentially a SALT cap workaround: the S-Corp deducts the BAIT paid federally, reducing K-1 income, which is great for federal taxes if you itemize above the cap. In summary, NJ S-Corps have a few extra hoops but can also leverage deductions via BAIT.
States with No Income Tax 🌴	A few states like Florida, Tennessee, South Dakota, Wyoming, Washington, Nevada have no personal income tax and either no corporate tax or exempt S-Corps. For example, Florida doesn’t tax S-Corp income at the corporate level (Florida’s corporate tax excludes S-Corps except on certain built-in gains). That means in these states, your S-Corp’s profit is only taxed federally. All the expenses you deduct federally flow through to effectively lower your federal and (no) state tax. These states might still have annual report fees or business license taxes (deductible if any). Nevada, Washington, Texas do have gross receipts taxes which function like entity tax. Always check local franchise or excise taxes (e.g., Tennessee charges an excise tax and franchise tax on S-Corps despite no wage tax on individuals). But by and large, being in a no-income-tax state means your S-Corp deductions mainly matter for federal (and you aren’t hit with state income on the pass-through).

Summary: While your deductible expenses themselves remain largely the same across states, the tax impact of your S-Corp’s deductions can vary depending on state regimes. In high-tax states, you might save a lot on your state personal return by deducting expenses (because they lower your K-1 income taxed at, say, ~10% state rate in NY or CA). In no-tax states, you won’t have state tax on the K-1 anyway. Some states nick S-Corps with entity-level taxes (CA, IL, etc.), which become an extra deductible expense but also an out-of-pocket cost.

Also, the advent of Pass-Through Entity Taxes (PTET) in many states is a recent trend: over 30 states now allow S-Corps (and partnerships) to elect to pay state tax at the entity level. This effectively turns otherwise personal state tax into a business expense deduction federally. It’s a response to the $10k SALT cap. If you’re in a state with PTET (like NY, NJ, CT, CA, IL, etc.), consider it – it won’t change your state liability (you either pay through entity or personally) but can restore a federal deduction for those taxes via your S-Corp. Check with your CPA, as these elections have deadlines.

Action for S-Corp owners: Know your state’s rules. Make sure you file any necessary state S-Corp elections. Budget for any franchise/minimum taxes. And take advantage of any state-provided deduction strategies (like PTET) to maximize your overall tax savings. Each state’s treatment is a bit different, but armed with knowledge, you can navigate state taxes and still keep most of the tax-saving benefits of your S-Corp.

🗝️ Key Tax Terms & Entities for S-Corps (Glossary)

Finally, let’s clarify some key terms and entities we’ve mentioned, and how they relate in the world of S-Corp taxation and deductions:

Internal Revenue Service (IRS)

The IRS is the U.S. federal tax authority. It creates forms, regulations, and guidance for enforcing tax laws passed by Congress. For an S-Corp owner, the IRS is the agency you file your business and personal tax returns with. It’s also who might audit your S-Corp’s deductions if something looks amiss. The IRS publishes helpful guides like Publication 535 (Business Expenses) and Publication 589/542 for corporations, which outline what you can deduct. Think of the IRS as the referee ensuring you play by the rules – following IRS guidelines (and keeping documentation) is crucial to keep your deductions safe.

S-Corporation (S-Corp)

An S-Corporation is not a different legal entity type, but a tax status that a corporation (or LLC) elects under Subchapter S of the Internal Revenue Code. By choosing S-Corp status, the business becomes a pass-through entity for tax: it generally pays no federal income tax itself. Instead, profits, losses, deductions, and credits flow through to shareholders’ personal tax returns via a Schedule K-1. S-Corp status comes with restrictions (like ≤100 shareholders, all U.S. persons, one class of stock) and requirements (like paying owner-employees a salary). The big advantage is avoiding double taxation (profits taxed only once at the owner level) and potential self-employment tax savings. From a deductions perspective, an S-Corp deducts business expenses on its own return (Form 1120S), reducing the income that gets passed to owners. In summary, an S-Corp is a business structure that offers the liability protection of a corporation, taxation similar to a partnership, and plenty of opportunities for legitimate tax deductions.

Pass-Through Entity

A pass-through entity is a business structure where the entity itself is not taxed on income. Instead, the income “passes through” to the owners’ personal tax returns. S-Corps, partnerships, and most LLCs (if not taxed as C-Corps) are pass-throughs. For S-Corp owners, this means the S-Corp’s deductions directly reduce your taxable income (by reducing the profit on your K-1). Contrast this with a C-Corporation, which pays corporate tax on its profits (taking deductions at the corporate level), and then if it pays dividends, owners pay tax again on those – not a pass-through. Because S-Corps are pass-throughs, they also unlock the Qualified Business Income (QBI) deduction for owners (a personal deduction equal to 20% of the business’s qualified profit), subject to limitations. The pass-through nature is what makes careful tracking of deductions so important – every extra expense you deduct in the S-Corp means less income taxed to you personally.

Form 1120S

Form 1120S is the U.S. Income Tax Return for an S-Corporation. This is the form your S-Corp files each year (due by March 15 for calendar-year corporations). It reports the S-Corp’s gross income, deductions, and net profit or loss, along with specific items like dividends, interest, capital gains, etc. Essentially, it’s like a partnership return – showing how the result is allocated to shareholders – but specific to S-Corps. On the 1120S, you’ll see sections for ordinary business income (revenue minus ordinary deductions like rent, wages, supplies) and a Schedule K detailing other items (like charitable contributions, Section 179 deduction, etc.) that need special handling. The form also asks about salaries paid, shareholder info, etc. Importantly, Form 1120S does not usually entail a tax payment (since the S-Corp doesn’t pay federal tax on its profit). But it must be filed accurately to allocate income and deductions to owners.

Schedule K-1 (Form 1120S)

The Schedule K-1 for S-Corp shareholders is a form that each owner receives as part of the 1120S filing. It breaks down each shareholder’s share of the S-Corp’s income, deductions, credits, etc. For instance, if you own 100% of the S-Corp, your K-1 will essentially show the same numbers as the S-Corp’s total – say $100,000 of ordinary business income, $20,000 of Section 179 deduction, $1,000 of charitable contributions, etc. If you own 50% of a two-owner S-Corp, and the S-Corp had $50,000 profit, you get a K-1 with $25,000 of income (plus any split of separately stated items). You use the K-1 to report the business results on your personal Form 1040 (mainly on Schedule E for the ordinary income).

The K-1 is the mechanism ensuring all those deductions we itemized flow through to you appropriately. For example, if the S-Corp donated to charity or depreciated assets, that might reduce your taxable income via entries on K-1. Important: Losses and deductions on a K-1 can only be used on your personal return if you have enough basis (investment) and are not limited by at-risk or passive rules. So the K-1 also reports your share of non-deductible expenses, distributions, etc., to track basis. Always keep your K-1s – they are essentially the bridge between the company’s books and your tax return.

Accountable Plan

An accountable plan is an IRS-approved reimbursement arrangement that allows a business to repay employees for business expenses without treating the payments as income. For an S-Corp, this is the tool to reimburse owners/employees for things like home office expenses, mileage on personal cars, cell phone use, or any other out-of-pocket costs. Under an accountable plan, the employee must provide substantiation (receipts, logs) and return any excess advance if not spent. If those conditions are met, the reimbursement is not included in wages on the W-2, and the S-Corp can still deduct the expense.

If a plan doesn’t meet these conditions, it’s a “non-accountable” plan and reimbursements would be taxable wages (and then the employee might not get to deduct the expense at all). So, an accountable plan is crucial for S-Corp owners because, as we discussed, it’s the only way to effectively claim deductions for things like a home office or personal vehicle use. Setting one up is as simple as a corporate resolution or written policy that outlines how employees submit expenses (with receipts, within e.g. 60 days of the expense) and that any excess advances must be returned. The term “accountable” comes from holding the employee accountable for proving the expense. It’s a magic wand to convert personal-pay expenses into business deductions properly.

Ordinary and Necessary (Expense Criteria)

These two words – ordinary and necessary – are the criteria from tax law (again, IRC 162) that define what business expenses are deductible. An expense is ordinary if it’s common and accepted in your line of business. It’s necessary if it’s appropriate and helpful for the business (it doesn’t have to be indispensable). For example, a software consulting S-Corp finds a high-speed internet subscription ordinary and necessary. If that same S-Corp paid for designer suits for its coders, the IRS might question that as not ordinary (software engineers don’t typically require suits for work).

Likewise, a luxury spa outing could be argued not necessary for most businesses (unless you’re actually in the spa business). These terms are subjective, but tax law relies on them to give flexibility. Courts often defer to business owners on necessity unless it’s clearly personal or extravagant. As long as you can articulate a business purpose for an expense and it isn’t completely outside the norm for your industry, it likely meets these criteria. When documenting expenses, it doesn’t hurt to note why they were necessary (e.g., “purchased specialized tool to fulfill client project – ordinary for our construction biz”).

Reasonable Compensation

This term applies to the wages paid to S-Corp owner-employees. The IRS requires that if you’re an active owner (working in your S-Corp), you must be paid a “reasonable” salary for the work you perform before taking distributions. Reasonable compensation is essentially what you’d pay someone else to do your job, based on your role, expertise, hours, and region. It’s both an IRS audit focus and a point of law: cases like the one mentioned (Watson) and IRS guidelines make it clear that labeling nearly all income as “distributions” to avoid payroll taxes is abusive.

The consequence of not taking reasonable compensation is the IRS can reclassify distributions as wages (assessing back payroll taxes, penalties). So from a planning perspective: pay yourself a fair wage, which your S-Corp deducts on 1120S. The remaining profit comes out as distribution (tax-free to the extent of basis). There’s no fixed formula for reasonable comp, but common approaches include using industry salary surveys, the 60/40 or 50/50 rule of thumb (pay at least 50% of profits as wages), or looking at the mix of duties (if you do both technical work and admin, factor those in). The key entity here is the IRS employment tax division, which polices this – and they have won many court cases adjusting unreasonably low salaries. By paying reasonable comp, you ensure compliance and also solidify that your remaining distributions are truly profit (not disguised wages).

Section 179 Deduction

We discussed Section 179 in the context of equipment; here’s a quick definition: It’s a tax code provision (IRC §179) that lets businesses elect to immediately deduct the cost of qualifying property rather than depreciate it. The Section 179 Deduction is often called the small business expensing allowance. For 2025, the maximum is $1.25 million. Qualifying property includes tangible personal property (machines, furniture, computers), off-the-shelf software, and certain building improvements. It’s limited by your business’s income (you can’t create or enlarge a loss with 179 beyond a certain point) and by a phase-out (if you buy too much property in one year, the allowance reduces).

For an S-Corp, Section 179 has an extra quirk: the deduction is passed through to shareholders on K-1, and each shareholder is subject to the $1.25M and business income limit on their personal return. So if you have multiple owners, you share the 179 deduction proportionally. It’s a popular tool to front-load deductions. In practice, you’ll check a box on Form 4562 (attached to 1120S) to claim 179 for specific assets. Section 179 essentially encourages investment by giving you an immediate tax break – a key term to know when planning capital purchases.

Qualified Business Income (QBI) Deduction

The QBI deduction, also known as the Section 199A deduction, is a personal deduction enacted by the Tax Cuts and Jobs Act for tax years 2018-2025 (unless extended). It allows owners of pass-through entities (S-Corps, partnerships, sole props) to deduct 20% of their qualified business income on their 1040. For S-Corp shareholders, your qualified business income is generally the net profit from the S-Corp (excluding things like shareholder wages, capital gains, etc.).

Essentially, if your S-Corp produces $100k of business income, you could get a $20k deduction off your taxable income, just for being a pass-through owner. There are limitations: high-income owners in certain service businesses (like consultants, doctors, lawyers) may see the deduction phased out, and there’s a wage/property factor for high earners – meaning the S-Corp needs to have paid some W-2 wages or have assets to maximize QBI deduction if your personal income is above a threshold (~$182k single / $364k joint for 2025, indexed).

The relationship here is that paying yourself a reasonable salary (W-2 wages) not only is required, but it can help support a full QBI deduction if you’re in the phase-out range, since the formula (for high earners) allows a deduction up to the greater of 50% of wages or 25% of wages + 2.5% of assets. It’s a bit complex, but the takeaway: The QBI deduction is a bonus pass-through tax cut that S-Corp owners can enjoy on top of all the expense deductions. It doesn’t affect the S-Corp’s books – it’s claimed on your personal return (Form 1040, line after itemizing or standard deduction). But it’s definitely a key tax concept to be aware of because it can significantly reduce effective tax rates on business profits. Unless extended, note that QBI deduction ends after 2025.

These terms and entities show up frequently in S-Corp tax discussions. Knowing what they mean and how they interact helps you navigate your S-Corp’s tax strategy more confidently. Essentially, the IRS sets the rules, the S-Corp and its 1120S/K-1 are the mechanism by which income and deductions flow, and concepts like ordinary vs. personal, accountable plans, reasonable comp, Section 179, etc., are tools and guidelines to optimize and substantiate your deductions.

🙋‍♂️ Frequently Asked Questions (FAQs) about S-Corp Deductions

Q: Can my S-Corp pay for my personal expenses (like my groceries or personal bills)?
No. Personal living costs are not business deductions. If your S-Corp pays personal expenses, the IRS will treat it as income to you or as non-deductible distributions, not a company write-off.

Q: Can an S-Corp deduct a home office?
Yes. You must do it via the S-Corp – typically by reimbursing the owner for home office expenses under an accountable plan. This way the S-Corp deducts the home office cost, and the owner isn’t taxed on the reimbursement.

Q: Can I deduct my vehicle expenses through the S-Corp?
Yes. If the vehicle is used for business, the S-Corp can deduct costs proportionate to business use. You’ll either have the company pay for all expenses and add back personal use, or have it reimburse you for business miles (at the IRS mileage rate or actual-cost percentage). Personal commuting or use is not deducted.

Q: Are health insurance premiums for S-Corp owners deductible?
Yes. The S-Corp can pay owner’s health insurance premiums and deduct them. If you own >2%, it must report those premiums on your W-2 (they’re taxable income for federal income tax), but you then take a personal health insurance deduction. The end result: the company deducts it and you effectively get a full deduction too, although via your personal return.

Q: Can an S-Corp deduct business meals and entertainment?
Yes (meals) and No (entertainment). Your S-Corp can deduct 50% of qualifying business meal costs (client lunches, travel meals, etc., with documentation). Entertainment expenses are not deductible – for example, sports tickets or concert outings for clients are a full no-go under current tax law.

Q: Are S-Corp shareholder distributions deductible as a business expense?
No. Distributions (the profits passed out to owners) are after-tax profit sharing. They do not reduce the S-Corp’s taxable income. Only expenses related to earning income (salaries, rent, supplies, etc.) are deductible. Owner distributions don’t count as an expense on the books at all.

Q: Do I need receipts for all my S-Corp expenses?
Yes. You should keep receipts and records for every business expense, especially for items like travel, meals, and any big-ticket purchases. The IRS requires receipts for expenses $75 and above (and for all lodging). Solid documentation will protect your deductions in case of an audit.

Q: Can my S-Corp have a tax loss, and if so, can I deduct it on my personal return?
Yes. An S-Corp can incur a loss if deductions exceed income (e.g., in a startup year or a bad year). That loss will pass through to shareholders on the K-1. You can deduct it against your other income if you have sufficient stock or debt basis in the S-Corp and are not limited by passive loss rules. Essentially, as long as you have invested or retained earnings in the company to absorb the loss, you can use it on your personal taxes – potentially giving you a refund or reducing other taxable income.

Q: Should I pay myself a very low salary to have more profit (distribution) and save on taxes?
No. The IRS requires reasonable compensation for S-Corp owners. If you underpay yourself to avoid payroll taxes, the IRS can reclassify distributions as wages (imposing back taxes and penalties). It’s safer to pay a fair market salary – the S-Corp deducts that wage, and you still save on taxes with remaining profit distributions and the QBI deduction. Essentially, don’t try to game the system with an unreasonably low salary; the short-term savings aren’t worth the risk.