S-Corp Tax Deductions: What You Can Deduct

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

Most "S-corp write-off" lists are the same generic business-expense lists you'd find for any company. What actually matters for an S-corporation is the handful of deductions that work differently because you're both an owner and an employee — starting with your own salary. Here's what you can deduct, the S-corp-specific rules that trip people up, and what isn't deductible no matter who tells you otherwise.

How S-corp deductions work

An S-corporation deducts ordinary and necessary business expenses under 26 U.S.C. §162 — the same standard every business uses. Those deductions reduce the company's net profit, and because an S-corp is a pass-through entity, that lower profit is what flows through to your personal return. So a legitimate deduction saves you tax at your personal rate; the company itself gets no separate refund.

The everyday categories are the same ones any business claims — a quick checklist so nothing gets missed:

• Payroll — wages to you 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 — more below).
• Software, subscriptions, and tools used in the business.
• Contractor and professional fees — subcontractors, your CPA, legal, bookkeeping.
• Advertising and marketing, including your website and ad spend.
• Business insurance (general liability, errors-and-omissions, etc.).
• Office supplies and equipment (equipment can be expensed under Section 179 or depreciated).
• Business travel and the business-use portion of vehicle costs.
• Business meals (generally 50% deductible) with a genuine business purpose.
• Continuing education and professional dues that maintain or improve your current business skills.
• Retirement plan contributions and employee benefits.
• Bank and merchant-processing fees, and interest on business loans.

None of those are S-corp-specific — they'd apply to a sole proprietorship too. The ones that need real explanation are those tied to you as an owner-employee, because the rules genuinely differ.

Your salary is a deduction — which is the whole point

The wages your S-corp pays you are a deductible business expense, and so is the employer half of the payroll tax on them. That deduction sits at the center of how the S-corp structure works.

Your reasonable compensation reduces the company's profit (good — it's deductible), but it's also subject to FICA (the cost of the S-corp deal). The profit left after your salary is taken as distributions, which avoid FICA. That's why the salary number is the one that matters: set it on defensible market data, and both halves of the equation — the deduction and the payroll tax — sit on solid ground. We cover the trade-off in How to Pay Yourself: Salary vs. Distribution.

A quick illustration: if your S-corp earns $150,000 before your pay and you take a defensible $90,000 salary, that salary is fully deductible to the company, and the remaining $60,000 of distributions avoids the 15.3% FICA that wages carry — worth about $9,180 a year. Push the salary below market to chase a bigger number and you've traded a few thousand dollars for audit exposure (there's no 60/40 shortcut). Run your own figures in the S-Corp Tax Savings Calculator.

The S-corp-specific deductions that work differently

These are the ones where being an S-corp owner-employee changes the rules.

Health insurance (the >2% shareholder rule). This is the most S-corp-specific deduction on the list and the one most often gotten wrong. If you own more than 2% of the S-corp, premiums the company pays for your health insurance follow a specific sequence:

1. The S-corp pays or reimburses the premium for your coverage.
2. The premium is added to your W-2 wages (Box 1) — so it's subject to income tax. But it's left out of the Social Security and Medicare boxes, which means no FICA applies (when the coverage is provided under the corporation's health plan, as it normally is).
3. You then take the self-employed health insurance deduction on your personal return (Schedule 1), which offsets the income added in step 2.

Done right, the premium is effectively deductible without ever touching FICA. Done wrong — most often by paying the premium but never putting it on the W-2 — the IRS can disallow the personal deduction, which is why it's a frequent audit flag and a common point of friction with the IRS. The mechanics are laid out in the IRS guidance on S-corp compensation and medical insurance.

Home Office Reimbursement (Not a Schedule A Deduction)

This is the deduction that trips up more S-corp owners than any other. Before the Tax Cuts and Jobs Act of 2017, employees could deduct unreimbursed employee business expenses — including a home office — as a miscellaneous itemized deduction on Schedule A. The TCJA eliminated that deduction for tax years 2018 through 2025. Because you are technically an employee of your S-corp (that's the basis for your W-2 salary), you cannot take a home-office deduction on your personal return. Schedule C is not available to you for this purpose; you file as an employee, not a self-employed person, with respect to your S-corp role.

The correct path is an accountable plan: a formal reimbursement arrangement under 26 C.F.R. §1.62-2 that the S-corp uses to pay you back for documented business expenses. Under an accountable plan the company reimburses you and deducts the reimbursement, and the money is not taxable income to you — as long as three conditions are met:

1. Business connection — the expense is a legitimate business expense.
2. Substantiation — you document it (receipts, a mileage log) within a reasonable time.
3. Return of excess — you repay any advance beyond your actual expenses.

For a home office, you calculate the business-use portion of your home using one of two methods:

• Square-footage method. Divide the square footage of the office by the total square footage of the home. Apply that percentage to actual home expenses (rent or mortgage interest, utilities, insurance, repairs). The office must be used regularly and exclusively for business.
• Actual-expense method. Track the direct costs attributable only to the office space. Less commonly used for residential spaces, but available.

The simplified method (the IRS's flat-rate $5-per-square-foot option available to sole proprietors on Schedule C) is generally not available through an accountable plan. Use the square-footage percentage applied to actual costs.

A properly documented accountable plan is fully defensible and has been used by S-corp owners for decades. What is not defensible: paying yourself a "home office allowance" as an informal reimbursement without a plan document, substantiation records, or a consistent methodology.

Vehicle Expenses

Vehicle costs work through the same accountable plan structure as the home office. Because you are an employee of the S-corp, you cannot deduct vehicle expenses on your personal return for the employer-related use; the S-corp must reimburse you.

When calculating the reimbursable amount, there are two methods:

• Standard mileage rate. The IRS sets a cents-per-mile rate annually (the rate adjusts each year; check the current IRS guidance for the applicable year). You track each business mile — date, destination, business purpose — and multiply by the rate. The standard mileage rate covers fuel, maintenance, depreciation, and insurance; no separate deduction for those items when using this method.
• Actual expense method. Track all vehicle operating costs (fuel, insurance, maintenance, registration, lease payments or depreciation) and multiply by the business-use percentage. More work, potentially more deduction if the vehicle is heavily used for business.

Either way, a contemporaneous mileage log is not optional. "Contemporaneous" is an IRS word that means written at or near the time of the trip, not reconstructed from memory at year-end. The log must show: date, destination, business purpose, and miles. An app that records trips automatically satisfies this.

Luxury auto limits under §280F. If the S-corp owns the vehicle (rather than reimbursing you for personal vehicle use), it is subject to the annual depreciation caps on passenger automobiles under 26 U.S.C. §280F. These caps limit how quickly you can depreciate an expensive vehicle, even if Section 179 expensing is claimed. Heavy SUVs (over 6,000 pounds GVWR) are subject to a different set of limits. The exact dollar caps change year to year as the IRS updates them for inflation; check the current IRS revenue procedure for the applicable year's figures. The key point: a luxury vehicle does not generate an unlimited deduction just because it is "business use."

Personal use must be backed out. If you use the vehicle for any personal miles, only the business-use percentage is deductible. "Commuting" — driving from your home to a regular business location — is not a business use. Personal use that is not logged and backed out will be imputed as taxable income at year-end if the IRS examines the vehicle deduction.

Section 179 and Bonus Depreciation

When an S-corp purchases equipment, machinery, or other qualifying property for business use, it has two accelerated options instead of depreciating the cost over multiple years: Section 179 expensing and bonus depreciation.

Section 179 (26 U.S.C. §179). This provision allows the S-corp to elect to deduct the full cost of qualifying property in the year it is placed in service, rather than depreciating it over its useful life. The annual deduction limit is set by statute and adjusted periodically by Congress; the amount has been in the range of approximately $1 million in recent years, though the precise current limit should be verified against IRS Publication 946 for the applicable tax year. The property must be placed in service (i.e., actually used in the business) in the year the deduction is claimed — purchasing equipment in December and storing it is not enough.

Bonus depreciation. Separate from Section 179, bonus depreciation allows an additional first-year deduction on qualifying property. Under the Tax Cuts and Jobs Act the bonus percentage had been scheduled to phase down from 100% (to 40% for property placed in service in 2025), but the One Big Beautiful Bill Act (Pub. L. 119-21), signed July 4, 2025, restored 100% bonus depreciation permanently for qualifying property placed in service after January 19, 2025. Because the applicable percentage still turns on when the property was placed in service, confirm the current rate against IRS guidance for your tax year.

How it flows through. Unlike a C-corporation, which takes Section 179 and bonus depreciation on its own return, an S-corp passes these deductions through to the shareholders on their Schedule K-1. You claim the deduction on your personal return, subject to your stock basis limitations — you cannot deduct more than your basis in the company. If the deduction exceeds your basis, the excess carries forward to future years.

The interaction with vehicles. Section 179 and bonus depreciation can be applied to vehicles, but the §280F luxury auto limits cap how much of the first-year deduction can actually be taken for passenger cars. Heavy SUVs (over 6,000 pounds GVWR) have a higher §179 cap under a separate provision, which is why "business SUV" deductions are sometimes cited in tax planning discussions. The limits are real; overstating them is an audit flag.

Retirement contributions. Contributions to a solo 401(k) or SEP-IRA are calculated from your W-2 wages — so an artificially low salary doesn't just invite an audit, it also caps how much you can put away tax-deferred. Another reason the salary should reflect real market value.

What you can't deduct

• Distributions. A distribution is a draw of profit that's already been taxed to you on your K-1 — it is not a business expense, so it's never a deduction. Treating distributions as if they reduce taxable income is simply wrong.
• Personal expenses. Commuting, personal meals, clothing, and a family vacation with one business lunch attached don't become deductible because an S-corp paid for them. The "ordinary and necessary" test is real.
• An unreasonably high salary. This is the error in the other direction. Owners usually pay themselves too little, but overstating salary to manufacture deductions has its own problems — wages must also be reasonable for the work, judged on the same factors the IRS weighs. The defensible number cuts both ways.

Deductions and the QBI deduction

One deduction interacts directly with your salary: the Section 199A qualified business income (QBI) deduction. Your W-2 wages are generally not themselves QBI, so paying yourself more salary can shrink the QBI deduction — but wages also factor into the §199A limits at higher incomes, so the effect isn't one-directional. It's facts-and-income-dependent; we work through it in How the QBI Deduction Affects Your S-Corp Salary. As always, chasing a deduction is never a reason to set an indefensible salary.

How WageProof helps

Deductions are mostly your accountant's domain — but the single biggest S-corp number, your salary, is both your largest deduction and your largest audit exposure. WageProof builds that number from BLS wage data for your role and metro area and documents it, so the deduction is defensible and the distributions above it are clean. See the methodology or view a sample report — then start your report, free to start and about 15 minutes.

This article is general information, not legal or tax advice. S-corp deduction rules — especially the health-insurance and accountable-plan mechanics — depend on your specific facts; consult a qualified tax professional.