What Can Be Deducted in an S-Corp?

By Mike Keenan

An S corp is a corporation that has elected to be treated as a partnership for tax purposes. This means that the company does not pay income tax; instead, income and deductions flow through to the personal income tax return of each owner. Both an S corp and a C corp have the same deductible expenses; the only difference is who pays the tax.

Costs of Goods Sold

Costs of goods sold always reduce the S corp's income for the year. S corporations can use either the LIFO or FIFO method of inventory. LIFO, short for last-in-first-out, considers the S corp to sell the most recently acquired inventory first. FIFO, or first-in-first-out, considers the S corp to sell the oldest inventory first. For example, if the company bought 10 pairs of shoes for $15 each in January and 20 pairs of shoes for $25 each in February, an S corp using LIFO that sells five pairs of shoes would have $125 in costs of goods sold. Conversely, a company using FIFO would have only $75 in costs of goods sold.

Overhead Costs

An S corp can also deduct the overhead costs such as rent and equipment. However, if the item is going to have a useful life of more than one year, you usually have to amortize the cost over the item's useful life, according to IRS regulations. For example, if the S corp purchases office furniture that has a useful life of 10 years for depreciation purposes, the S corp could deduct one-tenth of the cost each year.

Ready to incorporate your business? Get Started Now

Employee Expenses

The salaries and wages of employees can be deducted from the S corp income. This also includes any benefits the S corp pays for, such as retirement plan contributions made by the company. These include people who are only employed by the S corp but have no ownership interest as well as owners who also perform services for the S corp. Owners must receive a fair salary for their work and must treat that salary as earned income. However, the remainder can be treated as investment income.

Bad Debts

Bad debts can be deducted, but only to the extent the money was already included in taxable income. For example, if an S corp makes a loan of $50,000 to a supplier and the supplier goes out of business before repaying the $50,000, the S corporation can deduct it. Similarly, if an S corp uses the accrual method and reports $10,000 of income on its taxes in one year because it has an account payable for the sale, but then the buyer goes bankrupt and never pays, the S corp can deduct the $10,000. However, if the S corp agrees to a sale of goods but then the buyer reneges and no transaction takes place, the S corp cannot claim a deduction for the lost sale.

Ready to incorporate your business? Get Started Now
How to Figure Out My Income From My Sole Proprietorship


Related articles

Sole Proprietorship & Retained Earnings

Small business owners that organize as sole proprietorships enjoy fairly simple accounting and tax-paying chores. Like any other business, a sole proprietorship earns revenue, pays expenses and calculates net income on the difference. Sole proprietors should also keep track of their retained earnings -- the portion of profit that is kept in the business and not paid out to owners, employees or investors.

Tax Consequences of Converting a C-Corp to an S-Corp

Corporations are business entities formed under state law that exist separately from their owners. An S corporation is simply a C corporation that has elected to be taxed as a pass through entity. Converting from a C-corp to an S-corp has significant tax implications, which include potentially lowering the overall tax burden on the shareholders, but also changing who reports the income each year and limiting when the income can be reported on the shareholder's tax returns. However, an S-corp must meet several criteria, including having less than 100 owners, only having U.S. resident or U.S. citizen individuals and certain entities as shareholders, and not having more than one class of stock.

The Basis in an S Corporation

S corporations are businesses with 100 or fewer shareholders that can elect to be taxed as a partnership. The benefit of being taxed as a partnership is that the business’s profits are only taxed once; the stockholders pay tax on their share of what the S corporation earned during the year. As a result, each shareholder has a “basis” in the S Corporation which measures their after-tax investment in the business. Basis is an important measure for taxing certain shareholder transactions with the business.

LLCs, Corporations, Patents, Attorney Help

Related articles

Tax Implications for a Sole Proprietorship

When starting your own business, one of the most important decisions is how you want to organize your entity. The ...

What Can You Write Off on Taxes for an LLC?

The Internal Revenue Service treats LLCs differently for tax purposes than other types of entities insofar as members ...

Tax Advantages for a Corporation Buying a Vehicle

Most businesses need to pay for transportation -- of employees, customers or goods -- and corporations must weigh the ...

S Corporation Passive Income Restrictions

An S corporation is a corporation consisting of 100 or fewer shareholders that has a special tax designation granted by ...

Browse by category
Ready to Begin? GET STARTED