S Corporation Business Expenses “How To” Guide

08/15/2015

Wage Optimizer

Like any other business organization, the S Corporation must account for business expenses and deduct these expenses from Gross Receipts in order to calculate business income. WageOptimizer.com’s calculator helps S Corp employee owners quickly calculate business income for allocation to officer wages, profit sharing plans, profit distributions and self-employment taxes. Today’s post will discuss the basics of qualifying business expenses for deduction from gross receipts.

General Business Expenses (Expenses except car, meals, and officer compensation)

Regular business expenses that are neither vehicle nor meal/entertainment related are generally 100% deductible from gross receipts. In order to be deductible, the IRS defines business expenses as expenses that are “both ordinary and necessary” in the course of carrying on regular business. Such expenses include wages paid to non-owner employees and associated benefit payments and payroll taxes, payments made to contractors, non-capitalized or Section 179 capital expenditures such as materials or software purchased to perform business operations, and generally any expense that contributes to regular costs of goods sold. In using the WageOptimizer.com calculator, also include an estimate of overall depreciation expense in this category in case your business has capitalized assets that are depreciable. For information on more creative, legal deductible general business expenses, here’s a great Inc.com article: “7 Surprising Tax Deductions That Can Save Your Business Thousands”.

Meals Expenses

Meals expenses are generally meal and/or entertainment expenses incurred by any employee of the business in the normal course of carrying out their business duties. Even when meals are 100% reimbursed by the business, only 50% of the expense is deductible for tax purposes. This rule applies to all meals expenses incurred by any employee, any costs associated with meals provided for employees or customers by the business, and includes per diem meal expenses as well. One exception to the 50% limit is the providing of meals and facilities as part of a recreational or social activity provided primarily to low-paid employees. For more details on meals expenses, see Chapter 11 of IRS Publication 535, “Business Expenses” (http://www.irs.gov/publications/p535/ch11.html#en_US_2014_publink1000209148). The WageOptimizer.com calculator applies the 50% limit to all meals expenses entered, so if you have any meals expenses that are not limited include them in the General Business Expenses entry.

Vehicle Expenses

Vehicle Expenses are deductible solely for the business use of a vehicle, whether or not that use constitutes 100% of the vehicle’s use. The IRS provides for two different methods of accounting for vehicle expenses: actual expenses and mileage expenses. The WageOptimizer.com calculator uses actual vehicle expenses multiplied by the percentage of business miles of all miles driven in the vehicle to determine vehicle expense deduction. If you use the IRS provided mileage expense (57.5 cents per mile in 2015), you may simply calculate the total deduction, enter it in the Vehicle Expense field and then allocate 100% of miles to business use. For more information on business use of vehicle deductions, see Chapter 4 of IRS Publication 463, “Travel, Entertainment, Gift, and Car Expenses” (link: http://www.irs.gov/publications/p463/ch04.html#en_US_2014_publink100033930).

Conclusion

As with all tax considerations, when determining deductions for your S Corporation it is advised to do so with the help of your business’s tax attorney. Once you’ve determined the total amount of qualifying business expenses, you can enter that number into the WageOptimizer.com calculator along with meals, and vehicle expenses to get your profit before officer compensation.

Additional Resources

IRS: Publication 535 “Business Expenses”

IRS: Publication 463 “travel, Entertainment, Gift and Car Expenses”

Entrepreneur: 75 Items You May Be Able to Deduct from Your Taxes