S-Corp Tax Deductions: What You Can Deduct

Part of WageProof's complete guide to S-corp reasonable compensation.

An S corporation can deduct the same everyday business costs as any small business: rent, software, subcontractors, insurance and advertising. The S corporation election changes a shorter list of costs tied to the owner, because an owner who works in the business is now paid as an employee, with a W-2 form at year-end. That list covers the owner's salary, health insurance premiums the company pays for the owner, out-of-pocket costs the company pays back to the owner, and retirement plan contributions. Each of those can be a real expense and still lose its deduction when the paperwork step that makes it deductible is skipped. The everyday costs come first below, then the owner's list.

How S-corp deductions work

An S corporation deducts ordinary and necessary business expenses under 26 U.S.C. §162, the same standard a sole proprietor or a C-corporation works from. Those deductions reduce the company's net profit. Because an S-corp is a pass-through entity, that reduced profit is the figure that lands on the owner's K-1 and then on the personal return, where a deduction is worth whatever it saves at the owner's marginal rate; the corporation itself generally pays no federal income tax, so the saving shows up on the return rather than the company's.

None of the everyday categories is S-corp-specific; a sole proprietor claims the same things on Schedule C. They are still the ones worth reconciling against the general ledger once a year:

• Wages to owners and any employees, plus the employer share of payroll taxes
• Rent and utilities for business space, or an accountable-plan reimbursement for a home office
• Software and subscriptions used in the business
• Subcontractors, and CPA, legal and bookkeeping fees
• Advertising, marketing, and the website
• General liability and errors-and-omissions insurance
• Office supplies and equipment, with equipment either expensed under Section 179 or depreciated
• Business travel and the business-use portion of vehicle costs
• Business meals with a genuine business purpose, 50% deductible
• Continuing education and professional dues that maintain or improve the skills the business already uses
• Retirement plan contributions and employee benefits
• Bank and merchant-processing fees, and interest on business loans

The salary is a deduction

The wages the S-corp pays the owner are a deductible business expense, and so is the employer half of the payroll tax on them. The reasonable compensation reduces the company's profit and drags 15.3% FICA along with it, while the profit left after the salary comes out as distributions that carry no FICA at all. Both the FICA paid and the FICA avoided come off that one wage figure, and How to Pay Yourself: Salary vs. Distribution works through where to set it.

Say the company earns $150,000 before the owner's pay and the salary is a defensible $90,000. The salary is fully deductible to the company, and so is its $6,885 share of payroll tax on that salary, which leaves about $53,115 to take as distributions. Those distributions escape the 15.3% FICA that wages carry; paid out as extra salary instead, the same money would have lost roughly $7,500 to FICA for the year. Push the salary below market to widen that gap and the owner has traded a few thousand dollars of tax for audit exposure, since no 60/40 shortcut makes the split safe. Run the numbers through the S-Corp Tax Savings Calculator. The reasonable salary calculator shows how WageProof sets the salary side from BLS wage data for the owner's duties.

The S-corp-specific deductions that work differently

Health insurance and the >2% shareholder rule

Premiums the S-corp pays for a shareholder who owns more than 2% of the stock become deductible on the owner's personal return only if they move in a fixed order:

1. The S-corp pays the premium or reimburses the owner for it.
2. The premium is added to the W-2 wages in Box 1, where income tax applies to it. It stays out of the Social Security and Medicare boxes, so no FICA applies, as long as the premiums are paid under a plan or system that covers all employees or a defined class of them.
3. The owner takes the self-employed health insurance deduction on Schedule 1 of the personal return, offsetting the income that step 2 added, but not for any month in which the owner or a spouse could have joined another employer's subsidized health plan.

The usual failure happens at step 2: the company pays premiums all year and nobody adds them to the W-2. The IRS can then disallow the personal deduction. The mechanics are set out in the IRS guidance on S-corp compensation and medical insurance.

Home office reimbursement through an accountable plan

Before the Tax Cuts and Jobs Act of 2017, an employee could deduct unreimbursed employee business expenses, a home office among them, as a miscellaneous itemized deduction on Schedule A. The TCJA closed that route starting in 2018, and the One Big Beautiful Bill Act (Pub. L. 119-21) made the closure permanent rather than letting it lapse after 2025. 26 U.S.C. §67 now allows no miscellaneous itemized deduction for any taxable year beginning after December 31, 2017, and the current text carries no expiration date. Because the owner is an employee of the S-corp with respect to that role, which is the same fact that puts the owner on a W-2, neither Schedule A nor Schedule C is open here.

That leaves the accountable plan, the reimbursement arrangement described in 26 C.F.R. §1.62-2. The company pays the owner back for documented business expenses and deducts what it pays, and the money is not taxable income, provided three conditions hold:

1. The expense has a business connection.
2. It is substantiated with receipts or a mileage log within a reasonable time.
3. Any advance that exceeded the actual expenses is returned.

For the home office itself, the reimbursable amount is the business-use share of the home. A common method is to divide the square footage of the office by the total square footage of the home and apply that percentage to actual costs: rent or mortgage interest, utilities, insurance, repairs. The space has to be used regularly and exclusively for business, which is where a corner of the dining room fails. The alternative is to track only the direct costs attributable to the office space, which rarely amounts to much in a residence. The IRS's flat-rate $5-per-square-foot simplified option is not a third choice here: it does not apply to an employee who is reimbursed under an arrangement like an accountable plan (Rev. Proc. 2013-13, section 4.02), so the reimbursement works from the percentage applied to actual costs.

A "home office allowance" paid on the first of the month, whatever the actual costs and with no receipts behind it, fails §1.62-2: a flat payment made regardless of expenses fails the business-connection condition, and without receipts it fails substantiation. Payments under a failed plan are wages, reportable on the W-2 and subject to income tax withholding and payroll tax on both halves.

Vehicle expenses

Vehicle costs run through that same accountable plan, meaning the S-corp reimburses the owner for business use of a personal car instead of deducting it somewhere on the personal return. The simplest reimbursement is the standard mileage rate, a cents-per-mile figure the IRS sets each year; in 2026 it moved mid-year, rising to 76 cents a mile on July 1 after increases in the price of fuel. Miles driven before July 1 stay at the earlier rate, which splits a 2026 log in two. Because the rate already covers fuel, maintenance, depreciation and insurance, none of those come off separately.

The actual expense method instead totals every operating cost for the car, including fuel, insurance, maintenance, registration, and lease payments or depreciation, and applies the business-use percentage to the total. It takes more bookkeeping, and it beats the mileage rate mainly when the car is expensive to run and heavily used for business.

Keep the mileage log as trips happen, at or near the time of each trip, rather than reconstructing it from memory in April. The regulation does not require a log written at the time of each trip, but a record made at or near the time is far more credible than one written later, and the IRS treats a log updated weekly as timely kept. For each business trip the log generally needs the date, the business purpose and the miles, plus the car's total miles for the year so the business-use share can be shown. An app that records trips automatically can serve as the log, as long as the business purpose of each trip is recorded too.

If the S-corp owns the vehicle rather than reimbursing the owner for one, the annual depreciation caps on passenger automobiles in 26 U.S.C. §280F apply, and they bind even when Section 179 expensing is claimed. For a passenger automobile placed in service in 2026, Rev. Proc. 2026-15 sets the first-year cap at $20,300 where bonus depreciation applies and $12,300 where it does not, followed by $19,800 in the second year and $11,900 in the third. Heavy SUVs over 6,000 pounds GVWR fall outside the passenger-automobile definition in §280F and under a different set of limits.

Only the business-use percentage is deductible, and commuting between home and a regular business location is not business use. If the S-corp owns the car, the value of the owner's personal use has to be included in the W-2 wages, and the log is what separates personal miles from business miles. If the company reimburses personal miles driven in the owner's own car, those payments are wages too.

Section 179 and bonus depreciation

Section 179 (26 U.S.C. §179) lets the company elect to deduct the full cost of qualifying equipment, machinery or other property in the year it is placed in service instead of spreading it over the property's useful life. The limit is set by statute and adjusted for inflation; for tax years beginning in 2026 it is $2,560,000, phasing out dollar for dollar once qualifying purchases for the year pass $4,090,000 (Rev. Proc. 2025-32). "Placed in service" means ready and available for its specific use in the business, even if use has not started yet. A machine delivered in December that is not installed and working until spring belongs to the following tax year; one that is ready to run in December counts for that year even if it sits idle until spring.

Bonus depreciation is a separate additional first-year deduction, and under the Tax Cuts and Jobs Act the percentage had been scheduled to phase down from 100%, reaching 40% for property placed in service in 2025 and 20% in 2026, until the One Big Beautiful Bill Act (Pub. L. 119-21), signed July 4, 2025, restored 100% bonus depreciation permanently for qualifying property acquired after January 19, 2025. The date that matters is when the property was acquired: property acquired before January 20, 2025 stays on the old schedule even if it is placed in service later, so it gets 20% if placed in service in 2026.

The S-corp passes the Section 179 deduction through to shareholders on the Schedule K-1 (box 11), so the owner claims it on the personal return, limited by the basis in the company's stock and in any loans made to it; anything disallowed carries forward to a later year. Bonus depreciation is not passed through separately: the company takes it as part of its own depreciation, which lowers the profit on the K-1.

Both can be applied to vehicles, though the §280F caps above limit how much of the first-year deduction actually lands on a passenger car. Heavy SUVs over 6,000 pounds GVWR fall outside the §280F caps, but Section 179 has its own cap for a sport utility vehicle: $32,000 for tax years beginning in 2026 (Rev. Proc. 2025-32). The §280F caps still bind anything lighter, and a first-year deduction claimed above them gets adjusted back down if the return is examined.

Retirement contributions

Contributions to a solo 401(k) or SEP-IRA are calculated from the owner's W-2 wages, and what the company contributes is deductible to the company, so a salary set low to shrink FICA shrinks the tax-deferred ceiling in the same move.

What you can't deduct

A distribution is a draw of profit the K-1 already taxed to the owner, and subtracting it from the company's income would count the same dollar twice; it is not a deduction and does not become one. Personal expenses do not change character by running through the corporate account either: §162 tests the expense rather than the account it ran through, which leaves commuting, personal meals, clothing, and the family trip with one business lunch attached exactly where they started.

Inflating a salary to manufacture a deduction fails the same reasonableness test from the opposite side, because wages have to be reasonable for the work actually performed, judged on the same factors the IRS weighs when a salary looks too low.

Deductions and the QBI deduction

The salary also moves the Section 199A qualified business income deduction, which the One Big Beautiful Bill Act made permanent after it had been scheduled to expire at the end of 2025. Because W-2 wages paid to the owner are not qualified business income, paying more salary can shrink the 20% deduction.

The effect reverses at higher incomes, where the deduction is limited by the W-2 wages the business pays and more salary can hold the deduction up rather than cut it down. For 2026 that wage limitation only starts to apply once taxable income clears $201,750 on a single return or $403,500 on a joint one (Rev. Proc. 2025-32). Below those thresholds W-2 wages do not constrain the deduction at all, so two owners with the same business and different household income get different answers from the same salary. We work through it in How the QBI Deduction Affects an S-Corp Salary.

How WageProof helps

The salary is the one deduction on this list that cannot be pulled out of the owner's books. Every other figure above is already sitting in the general ledger, while a defensible wage figure has to be built from market data for the work actually done, and it carries the largest deduction and the largest audit exposure in the same number. WageProof builds that figure from BLS wage data for the role and the county's BLS wage area (or, when BLS publishes nothing usable there, the next step in the fallback order on the methodology page, such as the state or national figure), and writes down every step of the derivation. The page on reasonable compensation reports for S-corp owners lists what each one contains. The methodology page lays out the data and the steps behind it. If the owner would rather see the output first, there is a sample report. A report costs $199 and takes about 15 minutes to build, and one can be started here. Accounting firms that prepare these reports for their clients use an annual plan instead, from $499 a year for 10 reports.

This article is general information, not legal or tax advice. S-corp deduction rules, and the health-insurance and accountable-plan mechanics in particular, depend on the specific facts; talk them through with a qualified tax professional.