S corp tax deductions business owners should know

Whether you’re traveling to a business meeting, purchasing a cell phone for work calls, or building a small business from your basement, running an S corporation comes with a lot of expenses.

The good news? It also comes with a lot of tax advantages. That’s because S corps, like limited liability companies (LLCs), sole proprietorships, and partnerships, are pass-through entities.

This means S corps:

• Don’t pay corporate taxes
• Report profits, losses, deductions, and credits on the business owners’ personal tax returns
• Avoid double taxation, meaning the business and its owners aren’t both taxed

S corp owners earn money through distributions, the profits and losses that pass through the business to their personal taxes, and through the salary they pay themselves. By splitting income into salary and distributions, small business owners avoid the 15.3% self-employment taxes on distributions, which can result in thousands of dollars in tax savings.

Another way S corps can save on federal income taxes is through deductions. Any business expense that supports business growth and daily operations can be a tax deduction. The more expenses you can document, the more you can reduce your taxable income.

Generally, S corp deductions are claimed on IRS Form 1120-S, U.S. Income Tax Return for an S Corporation. This form reports business income, expenses, and credits. For the 2025 tax year, this form is due by March 15, 2026.

Let’s take a look at the key tax write-offs an S corp can take to lighten the business’s tax burden and ensure self-employed individuals lower their personal tax bill too.

If you own an S corp, you can usually deduct 100% of your business’s ordinary and necessary expenses. According to the IRS, eligible expenses must be:

• Common and acceptable in your business industry
• Helpful and appropriate for your trade or business operations

Common expenses can include business insurance, payroll, and compliance costs. It’s important to keep detailed records of every business expense, so they can be verified if the IRS conducts an audit.

Paying yourself a W-2 salary is important to stay compliant with IRS regulations, avoid penalties, and ensure payroll taxes are paid on time. There are also key deductions tied to this pay, including:

• Reasonable salary: Wages paid to the owner based on fair market pay for their time, effort, and experience.
• Payroll taxes: The employer’s portion of Social Security and Medicare taxes is paid for all W-2 employees.
• Bonus payments: Reasonable bonuses paid to the owner, such as performance incentives or annual holiday bonuses.

To determine a reasonable salary, many S corporation owners follow the 60/40 rule, dividing business income into two parts: 60% as salary, 40% as shareholder distributions.

The IRS allows S corps to deduct health insurance premiums for shareholders who own more than 2% of the company. To claim this deduction, the company must align with a few key requirements, including:

• Premiums paid by the S corp on behalf of the shareholder aren’t pre-tax and must be added to IRS Form W-2 Box 1, similar to bonus wages.
• Premiums typically aren’t subject to Social Security or Medicare taxes.
• Shareholders can take a Self-Employed Health Insurance deduction on their individual Form 1040, which will reduce their adjusted gross income.
• The deduction can’t exceed the shareholder’s S corp wages.
• Qualifying shareholders can include an owner, plus their spouse, parents, children, or grandchildren who own at least 2% of stock in the company.

Keep in mind that if a shareholder or their spouse is eligible for another employer-subsidized health plan, this deduction isn’t allowed.

To claim this deduction, the S corp pays the premium or reimburses the shareholder, reporting the amount on their W-2. The shareholder then deducts the amount from their personal Form 1040.

Providing structured benefits can keep employees happy, increase retention, and boost a business’s tax efficiency by maximizing deductions and leveraging tax credits.

Typically, non-owner employee wages and benefits are considered ordinary business expenses and can be fully deducted by S corps. These can include:

• Reasonable employee wages, salaries, bonuses, and commissions
• Retirement plan contributions, such as 401ks and SEP IRAs
• Payroll taxes, including the employer’s paid portion of Social Security, Medicare, and unemployment taxes
• Fringe benefits, such as health insurance, educational assistance, and childcare

S corps can deduct ordinary, necessary expenses that keep the business running smoothly day after day. These can include:

• Professional fees for CPAs or accountants, attorneys, or consultants
• Marketing and advertising services
• Office expenses, including supplies, furniture, equipment, software, and subscriptions
• Professional development courses
• Business-related meals, although there’s a 50% limit on these deductions

Typically, you can also write off business insurance premiums, including:

• General liability insurance
• Professional liability insurance
• Workers’ compensation insurance
• Cyber insurance

S corps can deduct home office expenses for spaces used exclusively and regularly for business purposes. S corp owners and employees who work from home can be reimbursed for business expenses based on the percentage of home square footage used for business.

Tax-free home office deductions can include:

• Mortgage interest and property taxes
• Rent
• Utilities, such as electricity, water, heat, and internet services
• Homeowner’s insurance
• Security systems
• HOA dues and cleaning services
• Depreciation of the home office area

To deduct these costs, S corp owners must submit an expense report that documents and verifies each item, including a business-use percentage based on the home office square footage.

An S corp can’t directly deduct expenses if you personally own the vehicle you’re using to visit clients, deliver orders, or handle other business-related needs. Instead, the company can reimburse you for business use of the vehicle in one of two ways:

• Standard mileage rate: Using a simple formula, you can deduct a flat rate for every work-related mile you drive, plus parking fees and tolls. For the 2025 tax year, the standard mileage rate for business is 72.5 cents per mile.
• Actual expenses: You can deduct the actual costs to operate your vehicle for work, including gas, maintenance, repairs, tires, depreciation, registration fees and licenses, parking fees and tolls, and insurance.

If you claim a vehicle depreciation amount under actual expenses, you’ll also need to file Form 4562, Depreciation and Amortization.

If the S corp has a business-owned vehicle for work duties, the company can directly deduct actual expenses, including:

• Gas
• Repairs and maintenance
• Insurance
• Registration
• Depreciation for owned vehicles, or lease payments for leased vehicles
• Interest

Company-owned cars cannot deduct mileage for business travel.

However, S corp shareholders using a company car for personal needs receive a taxable fringe benefit. If you’re using the company car for personal errands or commuting, you must track all mileage—not just business mileage—so you can accurately report the business-use percentage for year-end deductions.

Business-related travel expenses can be deducted if the trip requires an overnight stay away from the company’s “tax home.” Fully deductible business travel expenses include:

• Transportation, including airfare, train tickets, car rentals, and taxi or Uber services
• Personal vehicle expenses, such as mileage, gas, parking fees, and tolls
• Lodging, including hotels, motels, and Airbnbs
• Baggage fees, internet access, tips for hotel staff, and other incidental costs

Business meals during a business trip, including those from restaurants, room service, and airport vendors, are typically 50% deductible, but the bill must be reasonable—not lavish or extravagant.

Depreciable business assets are tangible or intangible property owned by the S corp to generate income and typically used for more than one year. These can include:

• Equipment and machinery, such as computers, printers, and specialized tools
• Cars, trucks, vans, and other vehicles used for business
• Desks, chairs, filing cabinets, and other office furnishings
• Office buildings, retail spaces, warehouses, and structural improvements
• Software and subscription services
• Patents and copyrights

A business can deduct the cost of an asset over its useful lifespan using IRS-approved depreciation methods such as:

• Modified Accelerated Cost Recovery System (MACRS): Allows for larger deductions in early years.
• Straight-line: Spreads the cost evenly over an asset’s useful life.

If you’d like to deduct an item faster, the IRS offers a few special shortcuts for immediate expensing:

• Section 179: Let's S corps deduct the full purchase price of an eligible asset in the year it’s placed in service instead of depreciating over time. In 2026, the maximum deduction is about $2.56 million, with a phase-out starting around $4.09 million in total equipment purchases. These limits are adjusted annually for inflation.
• Bonus depreciation: For qualifying assets purchased and placed in service after January 19, 2025, S corps can claim 100% bonus depreciation.

For the 2025 tax year, an S corp can deduct up to $5,000 in startup costs and up to $5,000 in organization costs in its first year of business.

Startup costs can include:

• Market research
• Employee onboarding and training
• Location scouting

Common organizational costs:

• State registration and incorporation fees
• Legal fees for drafting operating agreements
• Accounting setup fees

If these costs exceed $50,000, the $5,000 deduction is reduced dollar-for-dollar, and any remaining, non-deducted expenses must be amortized over 15 years. Additionally, if your business’s total startup costs or total organization costs exceed $55,000, no immediate first-year deduction is allowed for that category. Instead, all costs must be amortized.

While many business expenses are deducted at the corporate level, there are some that pass through the S corp to the shareholders’ personal tax returns. Some of the key owner-level deductions include:

• Qualified business income (QBI) deduction (Section 199A) lets eligible S corp shareholders deduct up to 20% of their qualified business income on their personal tax returns, subject to taxable income thresholds. For 2025, the limits are $197,300 filing single filers, or $394,600 married filers filing jointly.
• Charitable contributions made by the S corp can be claimed as itemized deductions on an owner’s Form 1040 Schedule A.
• State and local taxes (SALT) deduction allows the business, rather than the business owner, to pay state income taxes. Offered in many states, this deduction bypasses the standard $10,000 federal SALT cap, reducing shareholders’ personal tax liability.

An IRS-compliant Accountable Plan is a formal expense reimbursement policy that allows an S corp to pay back its owner and employees for out-of-pocket business expenses on a tax-free basis.

Without an Accountable Plan, the IRS may consider company reimbursements as taxable income, increasing the amount you owe on your personal income taxes.

To deduct these expenses, S corp owners must submit an expense report that documents and verifies each item. It’s critical to thoroughly document everything, including:

• Receipts and invoices, especially for expenses over $75
• Mileage logs
• Home office calculations for the business-use percentage of the space

Buying your family’s groceries with the company credit card or writing off meals with friends? These are major red flags for the IRS and could land you with a lengthy audit, fines, and other penalties.

As a general rule of thumb, business and personal finances should be kept separate. This means:

• Opening business checking and savings accounts
• Only taking deductions for things that are ordinary and necessary for business
• Limiting the company credit card to business purchases

Reporting an owner’s salary that’s significantly lower than comparable market wages, or not properly reporting distributions, could land you in hot water with the IRS, including fines and double taxation.

Hiring a CPA or tax professional will help you to:

• Determine a reasonable salary
• Ensure proper Schedule K-1 reporting
• Handle payroll
• Maximize deductions
• Avoid reclassification penalties
• Maintain compliance

An experienced accountant can assist with year-round tax planning, so your finances are tracked, forms are filed on time, and you’re not getting any surprise tax bills from the IRS.