[Editor's Note: Today's Platinum Level Scholarship Sponsored post comes from Alexis Gallati, EA, MBA, MS Tax, CTP, and Founder/Lead Tax Strategist of Cerebral Tax Advisors. Alexis grew up in a family of physicians, married a physician, and focuses her expertise on tax planning and maintenance for physicians.]
Regardless of the kind of operation or business you run today, you are probably always looking for ways to lower your tax burden. You may be seeking S-corp tax “secrets” and strategies, it only makes sense—we all want to save money where possible, right?
For healthcare professionals with S-corps, you are aware your profit is passed to you through a Schedule K-1 and taxed at the individual level instead of being taxed at the S-corp level. As a means to protect your liability while still offering the benefits of personal taxation, S-corp status saves you from paying medicare and social security taxes (aka self-employment taxes) on distributions.
This article covers S-corps with an owner/employee and/or spouse. If you have employees other than your spouse or children, the rules become a bit more complicated (that is for a future article). We’re here to clear up any confusion for you. Let’s look further into how you can reduce your S-corp taxes today.
S-Corp Tax Deductions
#1 Reduce Owner’s Wages
From my experience, I estimate that S-corp owners can slash personal payroll taxes by $8,000-$20,000 a year by lowering their inflated salaries. Lowering your salary allows the owner to take their remaining S-corp earnings as distributions which aren’t subject to self-employment tax. However, you need to make sure you don’t drop the salary below what the IRS considers “reasonable compensation”, as a yearly income of menial means will flag your return for potential audit. It’s also important to never take a distribution unless you have a salary.
How can you decide what that sweet spot is without violating the law? The first step is to find reliable stats regarding the wages for your job in your area of the country. Remember, most physicians who own their own businesses “wear many hats” and not only perform the work as a physician but also the bookkeeper, administrative assistant, travel agent, and even the janitor! You have to allocate your time between all these jobs and apply the appropriate hourly wage rate for each job to come up with your salary. Be sure to document your analysis in corporate minutes so that you can make a case if the IRS flags your justified salary.
#2 Cover Owner’s Health Insurance Premiums
Most healthcare business owners don’t realize you need to run your health insurance through your S-corp to deduct it. Next, for the owner or employee that owns more than 2% of the company, an S-corp can establish a health insurance plan in one of two ways: the S-corp pays the premium for the owner or family, or the S-corp reimburses the owner for the premiums.
Your S-corp’s health insurance plan can cover you and your spouse, dependents, and children under the age of 27. But, you only qualify for this kind of deduction if you go through these IRS-required steps:
- Make sure the S-corp pays for your insurance premiums directly or through reimbursement.
- The S-corp needs to include the health insurance as wages on your W-2, and
- Deduct the cost of the premiums using the self-employed health insurance deduction on Form 1040.
It’s important to note, you are unable to take this deduction if you and your spouse are eligible for health insurance through your spouse’s employer. In addition, the insurance premiums cannot exceed the amount of your S-corp salary.
#3 Employ Your Child
If you employ your children in your S-corp, although you must pay payroll taxes on the child’s wages, you can shift income from your higher tax bracket to your child’s lower tax bracket while saving for their future or covering current costs, like private school tuition.
In fact, each child can earn up to $12,200 in 2019 without paying any federal income taxes at all while your S-corp receives a deduction for their wages. This is an excellent opportunity to use your child’s earned income towards your child’s retirement savings, college savings, or to pay for current private schooling. In fact, if they are able to earn more than $12,200, you can pay them an extra $6,000, take a traditional IRA deduction, and then roll it over to a Roth IRA – all not being subject to income tax!
As an S-corp, your child’s wages are still subject to social security and medicare tax but starting a retirement account early allows for tax-free growth of those contributions. However, it is important to note that you have to have legitimate work for your child to perform in order for them to earn their wages and document it properly otherwise your child’s wage deduction may be denied under audit.
[Editor's Note: If your sole proprietorship hires your children, their wages are not subject to payroll taxes. There's a reason that my kids are not directly employed by The White Coat Investor, LLC but a separate company WCI contracts with.]
#4 Sell Your Home to Your S-Corp
If you are thinking about turning your home into a rental property in the near future, before you do that, consider this arrangement. If you sell your home to your S-corp, you can avoid taxes on the sale with home-sale exclusion of $250,000 gain (which can be $500,000 if you are married). This arrangement will also increase the rental property’s depreciable basis, which lays the foundation for greater depreciation deductions in the future.
Let’s look at an example. Let’s say you and your spouse bought your home 20-years ago for $250,000. Since you did not oversee any notable improvements, the basis in your home at the time of sale is still $250,000. If you sell the home to your S-corp for the current market rate of $750,000, you have a gain of $500,000. However, as a married couple, you can use your $500,000 home-sale exclusion to avoid taxes on the $500,000 gain.
If you converted your home to a rental without selling it to your S-corp, you could lose your homestead exemption depending on when you sell it. Selling the home to your S-corp increases the basis in the rental property. So, in our example above, the new depreciable basis of the property is $750,000 and the depreciation deduction flows through to your individual tax return from the S-corp.
Things to Consider
Do consider if selling your home to your S-corp will cause your property taxes to increase. In most cases, your property tax appraisal may already be around the fair market value of your home at the time of sale to your S-corp. Also, the benefits of the home-sale exclusion and the increased depreciation basis outweighs any increase in property taxes.
Lastly, since no one reports related-party sales to the IRS on tax returns, you don’t need to worry about the IRS flagging you for this one. Of course, under the law, you must treat the sale to your S-corp as a related-party sale, which means you should create evidence, such as appraisals, use of attorneys or title company, inspection on the home, etc. that shows you followed the rules for a sale to a related party.
#5 Home-Office Expense Deduction
Traditional tax deduction strategies always include looking for personal expenses that can be deducted against business earnings. The same holds true for S-corps. When the S-corp reimburses the owner for home office expenses, the reimbursement is a deduction for the S-corp. The result? Part of the owner’s living expenses become tax-free. Let’s dive a little deeper.
Things to Consider
Did you know that renting the office to your S-corp will provide you with a benefit of zero dollars? The S-corp deducts the rent paid to you. If you include the rent in your taxable income on your personal tax return, the current tax code does not allow you to claim tax deductions against the rental income. In addition, you cannot use Form 2106 to deduct unreimbursed expenses on your Schedule A anymore assuming you qualified over the 2% AGI limitation in the first place.
Therefore, to correctly pursue reimbursement, follow the roadmap the IRS lays out for you in IRS Regulation Section 1.62-2(c):
- As an employee submit expense reports to your corporation that include the expenses of your home office.
- Under the S-corp’s accountable plan, your business will reimburse you for the home office, claiming 100% of the home-office deduction as an office space.
- You will receive the reimbursement as a non-taxable reimbursed employee business expense.
To qualify a home office as a principal point of work, conduct most of your income-earning activities from inside it. Use the office to perform admin work and functions (make phone calls, send emails, read images, etc.). You will also need to audit-proof your reimbursement by properly documenting the expense and show exclusive, regular, and business use of your home office.
Tax Return Prep Tips
On the S-corp tax return, report the total reimbursement of the home office in the other deductions category as a line item labeled “office space”. Then, on your personal return, reduce your itemized deductions by the dollar amounts you received from the S-corp related to the office mortgage interest and property taxes.
Lastly, in the permanent file that you use for your personal taxes, be sure to track the depreciation that the corporation gives you for your home office. When you sell your home, you have to “recapture” depreciation and reduces your basis in your home. It’s always a good idea to keep records of this information, just in case.
In summary, the expense-report method I have described here is the only right and reliable method for achieving the full deduction for your home office.
#6 Rent Your Home to Your S-corp
You’re probably scratching your head right now going: what a minute? Didn’t you just tell me to sell the home? I did, but if you are not going to convert your home to a rental I am going to cover another way you can slash your S-corp taxes as it relates to renting your home.
As an S-corp owner, you can rent your entire home to the S-corp for up to 14-days per year and you don’t have to report the income. The S-corp will then deduct the full amount of the rent, which means you will accrue the income completely free of income tax. What could be better?
There are just a few things to be aware of if you are going to consider this path: don’t have the S-corp rent your home to entertain parties or customers. The entertainment facility rule disallows deductions for entertainment in any capacity. So, do not rent your home to your corporation for any entertainment use except for employee events and staff retreats. You can also rent your home to your corporation for business and board meetings.
If you are going to validate the rental, be sure to pay fair rental value and document the ordinary and necessary business activity to avoid flagging any IRS suspicion. It’s also wise to take pictures with date stamps as proof the event took place.
#7 Use of an Accountable Plan to Reimburse Travel Expenses
Let’s look at how an accountable plan can help you deduct more than just your home office: If you pay for a business expense out of pocket instead of through your business, your corporation can reimburse you under the accountable-plan rules. Within these rules, as the owner, you must incur these expenses in the performance of your duties for the corporation, and substantiate the expenses to the corporation in accordance with conditions set forth by the IRS. If you meet these payable requirements, or incur these expenses, the reimbursement becomes excluded from your gross income, not reported as wages on your Form W-2, and exempt from withholding and payment of employment taxes such as FICA. Do not claim these expenses personally on your Form 1040.
Below are some expenses that have special rules you should be aware of.
TIP: You can track your expenses via an Excel spreadsheet, online bookkeeping platforms such as QuickBooks Online, or apps such as Expensify. Contact me at [email protected] for an Excel spreadsheet with common expenses and expenses geared towards healthcare professionals.
If you are an S-corp owner that incurs business-related travel expenses, you must submit an expense report to achieve reimbursement by the S-corp. Travel expenses include airfare, car rental, baggage fees, lodging, meals, incidentals, etc. I recommend submitting an expense report with receipts on a monthly basis via your accountable plan. It is important to note that you cannot use the per-diem allowance method for reimbursement of lodging and must use actual travel expenses if you are more than a 10% owner (you can still use the standard meal allowances and incidental rates).
#8 Use of an Accountable Plan to Reimburse Cell Phone Expenses
The S-corp can reimburse the employee for the full cost of the phone and monthly services, deducting the amount on the business tax return. This makes the reimbursement tax-free income to the employee. Be sure to save the monthly cell phone bills and submit them with your expense reports on a monthly basis.
#9 Section 179 and Bonus Depreciation for Vehicles
Expanding on the vehicle deductions, a qualifying “heavy” vehicle (above 6,000 pounds) used for at least 50% business purposes can produce a Section 179 first-year depreciation deduction. With Section 179, you can expense up to $510,000 of qualifying new or used equipment placed in service. Heavy SUVs with GVWRs between 6,001 and 14,000 pounds are subject to a $25,000 limit on Section 179 expensing. If you are subject to the $25,000 limitation, any heavy new vehicles can also qualify for a 50% first-year bonus depreciation for the remaining depreciation base.
For example, if you buy a $45,000 heavy SUV, you can expense $25,000 under Section 179 and take $10,000 of 50% bonus depreciation on the remaining $20,000 of cost, and $2,000 of “normal” annual depreciation on the remaining $10,000 (20% x ($45k-$25K-$10k) in the same year. Total depreciation is $37,000 in the first year! A non-”heavy” vehicle used for at least 50% business use and classified as a passenger auto is subject to luxury auto depreciation limits. In contrast, using the example above, your depreciation write off in year one is only about $11,000.
It’s important to be aware that the Section 179 deduction is unable to exceed that year’s aggregate net business taxable income from all sources calculated before the section 179 write-off. Additionally, if your home office qualifies as a principal place of business, then all business trip to and from your place of work, such as a hospital, and even the office supply store, post office, etc, can rack up business miles and be reimbursed either via the standard business mileage deduction or actual expenses. This extra mileage will easily help you clear the “over 50% business use hurdle. Also, keep track of those trips between hospitals too if you work at more than one.
If you use your vehicle for personal and business mileage, you need to keep track of both by keeping a mileage log using a notebook or popular mileage apps such as MileIQ. In order to claim these deductions, you must keep all receipts and include these reimbursements in your W2 unless you have an Accountable plan set up.
#10 Contributing to Retirement
As most of you are aware, contributing to your pre-tax retirement accounts provides considerable tax savings. As an employee participating in any tax-deferred retirement plan (such as a 401(k), SEP, SIMPLE, or pension plan), your retirement contributions are deducted from each paycheck before taxes are taken out. Since contributions are taken out on a pre-tax basis, it lowers your taxable income, resulting in fewer taxes paid overall.
In my experience, for S-corps, it is best to set-up a solo 401(k) if you have no other employees but yourself, your spouse, and/or children. You can contribute up to $56K (2019) a year and also participate in a Backdoor Roth contribution ($6K in 2019) without being subject to pro-rata rules. However, if you want to contribute more than the $56K limitation for a solo 401(k), you’ll want to consider a Defined Benefit Pension Plan. These plans allow you to contribute up to six figures to your retirement plan along with the Backdoor Roth. Of course, each type of plan has their pros/cons and there is no one size fits all.
It’s recommended that you consult an advisor on this issue, especially if you have employees other than spouse and children.
Lower Your S-Corp Taxes
Now is the best time to start thinking about ways to reduce your tax burden as 2019 comes to an end. With a little patience and adequate documentation, it’s entirely possible to lower your S-corp tax burden for 2019. Remember, it’s important to be proactive throughout the year and to start implementing any strategies well before December 31st to take full advantage of their benefits.
I would love to hear about your takeaways, questions, or comments below!
Hello Alexis,
Nice post, a few FU questions. If my income or day job is entirely a W2 employee looking to invest and form a portfolio of real estate syndications and equity funds as a limited partner only (LP) with post-tax or taxable money what is the typical structure or vehicle that someone would form for both added asset protection as well as tracking expenses/depreciation and ease of record keeping. I have heard a LLC is worthwhile, but the question is how would you recommend structuring the LLC? What state to form it in and what is the typical cost for forming this type of LLC?
Thanks
Duke
Each of the investments is an LLC or LP already, so not sure the business structure matters too much as far as asset protection goes. The state you put it in doesn’t matter so much if the nexus of activity is in your state, you’ll have to pay your own state income taxes on that income. Putting it in an asset protection trust (in a state where they’re allowed) could provide some external asset protection I suppose. LLCs can be super cheap, mine was $70 to form and $15 a year. That’s the state fees, if you need to hire a lawyer, it’ll obviously cost more.
Well said! The fees for setting up and maintaining an LLC vary by state. For example, in CA, if you have an LLC it will cost you $800 minimum whether your LLC has any activity or not.
You can set up another entity to own and manage all of your RE investments which may help protect those investments against anyone who sues you personally. However, again, it depends on the laws of your state and would need to be discussed with an attorney. If you or a spouse are qualified active real estate professionals, there may be an opportunity to set up a separate business to take deductions as qualified business expenses.
On selling the home to the S-corp, what if you have an LLC that’s elected to be taxed as an S-corp? Does that change anything?
Also, what if the home has a mortgage on it? Is there a way to avoid a refi or payoff and keep the mortgage?
Thanks.
Doubt it. The IRS treats an LLC electing to be taxed as an S Corp as an S Corp. They don’t even like me calling myself a “member.” They’re like “What? You mean president?”
It doesn’t matter if you have an LLC, PLLC, PC, or even a C-corp. As long as you make the election to be taxed as an S-corp, that is how your entity will be taxed. However, some states do not recognize S-corps and tax them like C-corps.
Regarding the mortgage, it depends on your state laws and the mortgage company on whether you have to move it to the S-corp.
Interesting. Which states don’t recognize S Corps? Never mind, that’s Googlable material:
https://www.journalofaccountancy.com/issues/2011/feb/20103307.html
The District of Columbia, New Hampshire, Tennessee and Texas tax S corporations in the same manner as C corporations, meaning they pay corporate income or income-related taxes. Louisiana taxes S corporations as C corporations, but allows them to exclude from taxable income the portion on which shareholders have paid Louisiana income tax. All other states recognize S corporations as flow-through entities for income tax purposes.
NYC does not but the rest of NYS does.
If your S Corp deducts your health insurance costs, but adds back this cost to your W-2, is there any tax savings?
The key is in then taking the self-employed health insurance deduction. What she’s saying though, is you can’t JUST take the self employed health insurance deduction. You must do one of the other things too.
By doing it as recommended, you save the income tax and FICA taxes because the health insurance amounts are included in W-2 Box 1 compensation but not Box 3 or Box 5, then deducted on the personal return.
The same treatment is recommended for HSA contributions.
You save on Social Security and Medicare withholding but it is still subject to federal and state income tax withholding. In addition, it helps to lower the distributions (or income reported above your salary on the K-1) which can help save on state income taxes for states that have a separate tax for corporations and base the tax on those distributions.
What’s great about applying the health insurance to your W-2 wages, it can be used as part of your reasonable compensation. So, for example, if your reasonable salary is $100K and your health insurance is $15K a year, then you only need to pay yourself $85K of wages since the $15K.
For physicians with taxable income under $415,000, can you speak to the impact of an S-Corp on the Sec 199A QBI deduction? How would optimize it?
Best,
-PoF
Tricky area here because you have multiple things working against each other. In my case, way over the $415K (married) limit but not with a specified service business, the idea is to maximize the ordinary business income to maximize the deduction. That’s why we’re doing a Mega Backdoor Roth this year instead of tax-deferred employer contributions. However, for someone in a specified service business below the $415K limit, maximizing the income reduces the 199A deduction in the phase out range and could eliminate it completely. So to keep the income below that (and ideally below the phaseout range of $315K) you would want to tax-defer more money into your 401(k), but that also reduces ordinary business income and thus the deduction. A real catch-22.
In addition, with an S Corp structure, you’ve got the whole “how much do I pay myself as wages” issue. You want to pay yourself enough to be able to max out your retirement accounts, but bear in mind that every dollar paid as wages cannot be ordinary business income and thus cannot contribute to the 199A deduction. And of course the wages must be reasonable.
Lots of moving parts. I haven’t seen a calculator to optimize this yet so I’d love to hear if there is some rule of thumb I don’t know about.
I have yet to see any patterns yet since this deduction is still in its infancy but, in general, once you get above $200K you’ll want to start running the numbers to see if the S-corp or Sec. 199A deduction w/ sole prop makes sense. I do have clients that use an S-corp to make higher retirement payments and run losses through the business (which the sole prop can’t do) even though the S-corp makes as little as $40K a year. But you’re using the S-corp to run other tax reduction strategies and not for the self-employment tax savings.
I have a question on #2. I have been explicitly told by both our accounting firm and our payroll firm that the owners CAN NOT have the business pay for the premiums directly nor can I pay for this as wages as you have suggested. Can you you please provide any IRS documentation to back up your claim on #2?
I used to do exactly what you have described through our S-Corp but changed about 3 years ago as I was instructed from multiple sources that I cannot do this as an owner.
Thanks,
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues#Treating%20Medical%20Insurance%20Premiums%20as%20Wages
There is some nuance around how the insurance is obtained. But if this is a group plan established by the Corp then your accounting firm and payroll firm are certainly incorrect.
If the plan were obtained outside of the Corp then the advice you’re getting may be correct. Specifics matter.
I agree with the above answers thus far. There are very specific requirements needed in order to make this work. The S-corp first establishes a health insurance plan for the owner in one of two ways (Notice 2008-1: https://www.irs.gov/irb/2008-02_IRB#NOT-2008-1):
1. The S-corp makes the premium payments for the policy covering the employee who has more than 2% ownership
2. The owner-employee who has more than 2% ownership makes the premium payments to the insurance company and furnishes proof of the premium payment to the S-corp, which in turn reimburses the owner-employee for the premium payments.
Step 1: Get the cost of insurance on the S-corp books
Step 2: The S-corp has to include the health insurance premiums on the owner-employee’s W-2 form (not subject to Social Security or Medicare).
Step 3: The owner-employee claims the health insurance deduction on page 1 of Form 1040, providing you otherwise qualify for that deduction (aka not eligible for your spouse’s health insurance plan (IRC Sec. 162(I)(2)(B)).
Be sure your insurance premiums don’t exceed your S-corp salary (IRC Sec. 162(I)(5)!
I just talked to my insurance broker and she says if we can qualify for the S Corp to buy the policy (most insurance companies don’t sell group/business policies to businesses where the only employees are husband and wife like ours) the premiums are likely 20% less than we’re paying now buying it as individuals.
#4. Selling your home to the S Corp.
Novel idea and presumably steps around the requirement for living in the home for 2 of 5 years to earn the capital gains exemption. However, buying real estate isn’t a 100% tax deduction for the business. It’s depreciated over 27.5 years. It’s also unlikely anyone has $750K sitting in the company bank account for a cash purchase, so there’s the usual financing charges, interest, appraisals, etc. that happen in any non-party related transaction.
Isn’t this equivalent to refinancing at 100% of value and taking all the cash tax-free out of the property?
Hi, I am presently working as an independent contractor for 2 different organizations and am paid as a 1099. I am considering also doing some Locum Tenens work. In my situation, is there any benefit from setting up an S-Corp?
Thanks!
Hi John – Yes, there could be a benefit but it depends on how much you are making, your other sources of income (include spouse, if applicable, investments, etc) and your financial goals. If you’d like to give me more detail, I’d be happy to give you an idea if an S-corp would help.
You can save Medicare taxes on whatever you call distribution instead of wages. My rule of thumb is $100K in distributions to make it worth it for a typical doc. If you can call $100K distribution, that saves $2900 in Medicare tax and that’s probably enough to be worth the S Corp hassle/expense.
Thankyou for the article… I enjoyed the read. Quick comment on number 4, but I am not sure I would ever do this strategy since owning real property in an S Corporation is never ideal, there could be lots of hidden costs (thinking homestead act here), potential challenges on intent, the due to clause (although I have done this several times and never had an issue) etc. Also, I would not think that your primary residence would make a great business asset since it was probably purchased with the intent to live in versus an investment. Wouldn’t it just be easier to sell your property and use the proceeds to buy an investment that makes sense for the business….. just seems like you are having the tax tail wag the dog on this one. Either way, it is an interesting strategy.
Just to follow up on above point in regards to forming an LLC to house real estate syndications that I invest in as an LP, my home state is NJ but I plan to have syndications in multiple states FL, SC, TX, IL etc. In this case which state and structure would you form the LLC? Many people say Wyoming or Nevada are good states for this, nit sure your thoughts? Again, curios the costs now that I have given more specifics?
I’m not sure you need an “umbrella LLC” at all given all the syndications are in their own, so if you want one I’d go for where it is cheapest. I see NV and WY a lot too. some of that might be cost, but I think a lot of it is an attempt at asset protection.
Selling my house to the S Corp. Can you help me understand how this works. From my limited knowledge owning real estate in a S Corp is bad for several reason. First. How would I get the added depreciation deduction. I ask this because I am assuming a mortgage would be taken out to purchase the property. If this is true yes the purchase price would give me company a step up in basis. However shareholders of a S corporate do not tax basis for debt. Unless the money is directly loan from the shareholder. So for easy math if my s Corp purchased the property for $100 dollars. 20 dollars in cash and the rest in a mortgage. My deduction would be limited to the 20. I also say it is limited not only from my tax basis but the at risk rules as well.. second, concern is how do I get it out tax free. S Corp apply a tax on the distribution of property.
Last thing I noticed in your article. You appear to be confusing income and distribution. Income from S corps are not subject to SE tax. Distribution have nothing to do with SE tax. The only way distribution can be subject to tax is if the distribution is greater then your tax basis. If this occurs then it is a capital transaction and will either be taxed at short te rates or long term rates.
https://www.corporatedirect.com/c-corps-s-corps/why-you-should-never-hold-real-estate-in-a-c-corporation/
#3 is the big one. Although I’ve never heard anyone decide to elect C Corp taxation for an LLC /S Corp. That would be an odd setup. The bigger problem with holding real estate in an S Corp is usually outside investors, not taxes. You have to be a person (not an entity) and sophisticated RE investors prefer to invest through entities, not as individuals.
All of our properties were held in individual LLCs. I don’t think there’s any difference in the “sell your home to an entity strategy” between using an LLC or S Corp. It’s all detail stuff. All the different entities have pros/cons depending on the specific use case, but corporations usually have a higher PITA factor for maintenance and taxes vs. LLCs. It’s not bad with a single owner/operator, but profit distribution is more flexible for LLCs since the distributions can be easily changed at any time.
SE tax is due on the portion classified as salary. SE tax isn’t due on the portion classified as distributions.
It’s the first thing she talks about in the post along with picking an appropriate balance between the two.
As a single owner S corp based on number 6, I can rent my home out to my S corp and charge the S corp market rent. Say 350 day (cost to rent a similar home out) for 14 days and get a 4900 deduction. All I would need to do is keep minutes of my board meetings (meeting with myself and my wife) for those days?
In addition, is it okay to do bed 6 (above) and also take a home office deduction?
“So….what did you guys do at your 14 day business meeting?” says the auditor. “Interesting that it lasted exactly 14 days. Not 13. Not 15. But 14.” What’s your answer?
“So….what did you guys do at your 14 day business meeting?” It would be nice for one of the accountants to respond to this question that uses this strategy.
“Interesting that it lasted exactly 14 days. Not 13. Not 15. But 14.” What’s your answer? This is easier to answer as it is common practice to rent for only 14 days because of the tax implications, I feel like that is known and acceptable explanation.
Monthly Financial Reviews – 12 times a year, a Christmas event and a budget meeting in September all documented with pictures and minutes. Make sure you get a 1099 from the business as well.
Exactly. Just anticipate the issue and be prepared for it. Might have an issue though if you are also taking the home office deduction. So…you have a home office but had to rent the whole house to do a financial review?
Seems like a lot of hassle and documentation for a deduction that might save a few hundred bucks in taxes. I don’t even use the home office deduction. There’s just so many ways to expense bigger ticket items – conferences, travel, offsite relocation, vehicles, equipment, medical expenses, etc. that don’t raise questions.
Great post. I hope this comment is not too far off-topic, but in running my S-corp, I have occasionally been confused by the 401k rules. The latest bit of confusion is:
Are the employee parents or children of the owner of an S-corp eligible to open an individual 401k (aka solo-401k) plan via the business like the owner and her spouse are? The parents/children are employed by the S-corp and paid on a W-2. There are no other employees.
Are they automatically eligible because of the IRS’s family attribution rules, or do you have to make them official part owners?
No. If you have parents or children as employees you can’t use a solo 401k either. You could put in a regular 401k if you wanted to.
Alternately, you can setup Roth IRAs for the kids at any age. Just find a way for them to generate W2 income to fund it.
From my understanding, as long as the employees are not eligible for the 401k plan (aka full time employees) you can still have a Solo 401k plan. Also, most children aren’t eligible for the 401k plan because there is usually an age minimum for them to participate (usually 21). The parent would be a stickier situation and you’d want to make sure they didn’t qualify as full time employees.
There is a one year grace period if you do have eligible employees before you have to change to a business 401k plan.
Thanks for the great article.
I continue to struggle with Auto deduction as my account keep telling me to “stay away from it, just claim the miles” while i am considering buying a 6500 Lb vehicle.
I also invest money in larger projects, so having cash in my personal account is very imp. Hence i avoid put more than 18k in retirement to built up cash reserves for investments.
Can you deduct charitable donations in the name of your S-corporation? We will probably be taking the standard deduction in the future, so we won’t get any tax benefit from them on our individual return (not that that’s the only reason to make donations…)
Since S-corps are passthrough entities, any charitable donations are deducted at the shareholder level (aka on your tax return). If it were a C-Corp, the donations could be taken at the entity level.
Have you thought about “bunching” your charitable donations together for two years? So instead of making donations in year one and year two, you make both year one and year two donations together in one year? I’m not sure if your donations will be more than the standard deduction even if multiple years are combined but it’s worth a thought!
Thanks WCI for all your insightful posts and advice.
1099 doc here, previously filed as a sole proprietor making about $400k/year all 1099. Last year, our group put out a new requirement that independent contractors must be incorporated as S corps. As such, I spent a very painful 8+ hours putting together paperwork to create a corporation, fax S corp forms to the IRS, opening a business bank account, etc.
For a variety of reasons, I’m thinking of leaving the group and working primarily at another group that pays through a K1 structure. Through this, it doesn’t seem I’d benefit as much from the 2.9% Medicare tax savings that the S corp provides, and it seems like such a headache to maintain!
Hoping to poll WCI and the hive here on whether it’s worth it to keep the S corp and all the hassles of extra tax paperwork, minutes, state tax fees, etc required for this or to dissolve the S corp and to go back to being a sole proprietor.
Thanks for your input!
My rule of thumb is that it’s worth it for at least $100K in S corp distributions. Will you have at least that?
Do you have any recommendations as to a tax accounting firm that is knowledgable on how to file for s corps to be able to find tax savings? My current accountant did no better than myself on filing taxes and i will owe 160k on 440 on my scorp. 36% seems ridiculous. Please let me know. Thanks!
Here’s our recommended list:
https://www.whitecoatinvestor.com/tax-strategists/
No promises they’re better than you. You might be awesome, I dunno.
But I wouldn’t blame the tax code on your accountant. You don’t lower your tax bill by finding the right accountant. You lower your tax bill by changing the way you live your financial life. There are plenty of people out there who would be thrilled to only pay $160K in taxes too. I mean, imagine someone in CA in the top tax brackets for whom this S Corp income was all at the margin. 37% Federal. 3.8% payroll/PPACA. 12.3% state. That adds up to 53.1%. 53.1% of $440K = $234K. $160K sounds like a deal when you compare it to that.
My tax bill each year tends to be around 32-34% of all income. The only way I get it that low is by giving a ton away to charity and having a huge 199A deduction, which highly paid doctors don’t qualify for. The S Corp structure saves thousands in payroll taxes but not tens of thousands.
Curious. In your past posts, you noted that you only paid $8k or less than 20% of taxes.
https://www.whitecoatinvestor.com/dont-be-a-tax-idiot/
https://www.whitecoatinvestor.com/doctors-dont-pay-50-of-their-income-in-taxes/
When I read those posts, I was super FOMO thinking that paying $130k on $560k of combined income ($160k W-2 from my wife, $400k 1099 physician income from me). Has there been a big change in the tax code that is suddenly making your effective tax rate 32-34%?
These other numbers are more reassuring to me that I’m not overpaying. FWIW, I’ve tried everything I could do make the QBI cutoff, though no matter what – maxing out retirements, HSA, deducting business expenses, mortgage interest, etc – the lowest I can get is $450k.
Ha ha. Do you have any idea what my taxable income was when I was paying 8% versus what it is now? Katie says she’d love to be only paying 8% again, but we’re still coming out way ahead these days even paying 33%.
Totally! Guess it’s a congratulations for growing your clinical and WCI income enough to the point that you qualify for higher brackets! Though I agree with you philosophically on choosing your own charitable contributions to improve the world to rather than the blunt tool of government that funds the ambulance ride for the patient with 10 months of abdominal pain
Can you buy a small group health insurance plan through an S-corp of just you and your spouse, rather than an individual/family plan?
Not sure if any given carrier has a minimum employee number, but why not try? We bought on the open market using a health insurance broker both before we were an S corp and after we were an S Corp without employees and after we were an S Corp with employees. I don’t recall the price being all that different and the tax treatment was exactly the same.
How can a single employee/owner S Corp that will probably be in the 32% bracket get back into the low 20’s?
Details:
2023 Anticipated Business Income: 200k-230k
Yearly Expenses: Less than $1,500
Employee Salary: 80k
Home Office
Office Area: 120 sq ft
Maxed out Solo 401k
I was told rentals are my best option and then depreciate that over several years. If this my best option for reducing my tax liability, how do I minimize my risk/liability on the business side?
Thanks,
Josh
No. The best option to get into your 20s is to add a DBP to your solo 401(k), get married, and change states. But I’m skeptical you’re paying more than the low 20s if you’re only making $230K and barely into the 32% bracket.
Without REPS or the short term rental loophole, doing rentals only helps with deductions for passive income. BTW-An $80K salary for a doc is probably too low unless you’re part time. Not sure the IRS will find that reasonable.
What’s your business that you’re so worried about liability? Medicine? If so, buy malpractice insurance and my asset protection book.
Thanks for the quick reply TWCI!
I’m in tech field consulting for companies.
I use this calculator to determine my maximum contributions…
https://www.pacificlife.com/home/insights/calculators/self-employed-retirement-plan-maximum-contribution-calculator.html
I’d be open to contributing more if there are additional options I can pursue.
I’ve never been in the real estate industry so I’m cautiously talking with business advisors on my options. One said I would create possible additional liability on my S Corp if I purchased Rental property and ended up with a bad tenant. I want to make sure I protect the business as much as possible.
Thanks,
Josh
Oh yea, don’t put the rental property in the S corp of your business. Form a separate LLC for it.