S Corp Deductions: What Expenses Can You Write Off?

S corporations offer tax advantages, but maximizing deductions requires understanding which expenses qualify. Proper categorization and documentation can reduce taxable income and improve cash flow.

Knowing what your S corp can deduct ensures compliance while taking full advantage of tax benefits.

Ordinary and Necessary Costs

For an expense to be deductible, it must be ordinary and necessary under IRS guidelines. An ordinary expense is common in the industry, while a necessary expense is helpful and appropriate for business operations. The IRS defines these criteria to ensure deductions are legitimate.

Employee wages and salaries are among the largest deductions. Compensation must be reasonable for the work performed, as excessive salaries to shareholder-employees can trigger IRS scrutiny. The IRS requires S corporations to pay reasonable wages before distributing profits as dividends, which are not subject to payroll taxes. Payroll taxes, including Social Security and Medicare contributions, are also deductible.

Advertising and marketing costs, such as website development, social media ads, and promotional materials, qualify as deductions. The IRS allows businesses to write off expenses directly tied to generating revenue, including search engine optimization (SEO) services and email marketing campaigns. Professional fees, including payments to accountants, attorneys, and consultants, are also deductible when directly related to business operations.

Business insurance premiums, such as general liability, professional liability, and workers’ compensation, are deductible if necessary for protecting the company. Health insurance premiums for employees, including shareholder-employees who own more than 2% of the company, can also be deducted. These shareholders must report the premiums as wages on their W-2, but the corporation can still claim the deduction.

Depreciation and Asset Expenses

When an S corporation purchases long-term assets like machinery, vehicles, or office equipment, the cost is deducted over time through depreciation rather than in the year of purchase. The IRS provides depreciation methods, including the Modified Accelerated Cost Recovery System (MACRS) and straight-line depreciation. MACRS allows for faster depreciation in the earlier years, providing a larger deduction upfront.

Certain assets may qualify for Section 179 expensing, which allows businesses to deduct the full cost of eligible purchases in the year they are placed into service. For 2024, the Section 179 deduction limit is $1.22 million, with a phase-out beginning at $3.05 million in total asset purchases. This benefits businesses investing in equipment, vehicles, or software by accelerating the tax benefit. However, the deduction cannot exceed the company’s taxable income, meaning it cannot create a net operating loss.

Bonus depreciation allows businesses to deduct a significant portion of an asset’s cost upfront. Unlike Section 179, bonus depreciation can be used even if the deduction exceeds taxable income, potentially creating a loss that can be carried forward. As of 2024, bonus depreciation is set at 60%, down from 80% in 2023, and will continue to phase out by 2027. Businesses should evaluate whether immediate expensing or traditional depreciation methods provide the best financial advantage.

Home Office Expenses

Operating a business from home allows S corporation owners to deduct a portion of household costs, but eligibility depends on strict IRS rules. The workspace must be used exclusively and regularly for business, meaning a guest bedroom that doubles as an office would not qualify. Deductible expenses are based on the percentage of the home used for business, calculated by dividing the square footage of the office by the total area of the home.

Direct expenses, such as repairs or renovations made solely to the office space, are fully deductible. Indirect expenses, including mortgage interest, rent, utilities, homeowners insurance, and property taxes, are partially deductible based on the business-use percentage. The IRS provides two methods for calculating the deduction: the simplified method, which allows a flat $5 per square foot up to 300 square feet, and the actual expense method, which requires detailed records.

Since S corporations are separate legal entities, home office deductions are not taken directly on the corporate tax return. Instead, the business must reimburse the shareholder-employee under an accountable plan. This requires submitting expense reports, and the corporation must pay the reimbursement, which is then deducted as a business expense. Without an accountable plan, reimbursements become taxable income to the shareholder, eliminating the deduction’s benefit.

Recordkeeping and Documentation

Maintaining thorough financial records is essential for IRS compliance and audit protection. The IRS requires S corporations to retain documentation supporting deductions, including receipts, invoices, bank statements, and contracts. Without proper records, deductions may be denied, leading to additional tax liabilities and penalties. The general statute of limitations for tax audits is three years from the filing date, but if the IRS suspects substantial underreporting of income, this period extends to six years.

Bookkeeping systems should track expenses in real time to prevent errors and omissions. Accounting software like QuickBooks, Xero, or Wave allows businesses to categorize transactions accurately and integrate with bank feeds, reducing manual entry mistakes. Separating business and personal expenses is also critical; S corporation owners should maintain dedicated business bank accounts and credit cards to avoid commingling funds, which could jeopardize liability protection and create tax complications.

Payroll records must also be meticulously maintained, especially for shareholder-employees. The IRS scrutinizes S corporations for reasonable compensation compliance, and incomplete or inconsistent payroll documentation can trigger audits. Time-tracking systems, employment agreements, and payroll tax filings serve as supporting evidence that wages are appropriately classified and reported.