S-Corp Tax Deductions: What You Can Deduct

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

An S-corp deducts the same ordinary and necessary business expenses a sole proprietorship does: rent, software, subcontractors, insurance, the ad spend. Electing S-corp status changes a shorter list, and every item on it runs through your own W-2: your salary, the health insurance premiums the company pays for you, the costs you pay out of pocket and get reimbursed for, and the money that goes into a retirement plan. Each of those can be a real expense and still lose its deduction, because the paperwork step that makes it deductible got skipped.

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 your K-1 and then on your personal return, where a deduction is worth whatever it saves you at your own marginal rate; the corporation itself never gets money back from the IRS on its own account.

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 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
• 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

Your salary is a deduction

The wages your S-corp pays you are a deductible business expense, and so is the employer half of the payroll tax on them. Your 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 your pay and you take a defensible $90,000 salary. The salary is fully deductible to the company, and the remaining $60,000 of distributions escapes the 15.3% FICA that wages carry, worth roughly $9,180 for the year. Push the salary below market to widen that gap and you have traded a few thousand dollars of tax for audit exposure, since no 60/40 shortcut makes the split safe. Run your own numbers through the S-Corp Tax Savings Calculator.

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 stay deductible only if they move in a fixed order:

1. The S-corp pays the premium or reimburses you for it.
2. The premium is added to your 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 coverage is provided under the corporation's health plan, which is the normal arrangement.
3. You take the self-employed health insurance deduction on Schedule 1 of your personal return, offsetting the income that step 2 added.

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, and the omission is one of the things that bring an S-corp salary under review. 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 you are an employee of your S-corp with respect to that role, which is the same fact that puts you on a W-2, neither Schedule A nor Schedule C is open to you here.

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

1. The expense has a business connection.
2. You substantiate it with receipts or a mileage log within a reasonable time.
3. You return any advance that exceeded your actual expenses.

For the home office itself, the reimbursable amount is the business-use share of the home. Most owners 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 is a Schedule C shortcut for sole proprietors filing their own return, and an accountable-plan reimbursement works from the percentage applied to actual costs.

A "home office allowance" paid on the first of the month, with no plan document, no receipts and no consistent method behind it, fails the substantiation condition in §1.62-2. 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 you for business use of your own car instead of you deducting it somewhere on your own 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.

A mileage log has to be contemporaneous, an IRS word for written at or near the time of the trip rather than reconstructed from memory in April. Each entry carries the date, the destination, the business purpose and the miles, and an app that records trips automatically satisfies the requirement.

If the S-corp owns the vehicle rather than reimbursing you for yours, 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. Personal miles that are never logged and never backed out get imputed as taxable income at year-end if an examiner opens the vehicle deduction.

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 actually used in the business, so equipment bought in December and left in its packaging until spring belongs to the following tax year.

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, until 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. The percentage still turns on the placed-in-service date; property from an earlier year follows the schedule that applied then.

An S-corp passes both deductions through to shareholders on the Schedule K-1, so you claim them on your personal return, limited by your stock basis in the company; anything beyond basis carries forward to a later year.

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 sit under a separate provision with a higher §179 cap, which is the provision behind the heavy-SUV planning idea; 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 your W-2 wages, and what the company contributes on your behalf 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 you, 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

Your 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 you are not qualified business income, paying yourself 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 Your S-Corp Salary.

How WageProof helps

The salary is the one deduction on this list that cannot be pulled out of your own 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 you actually do, and it carries your largest deduction and your largest audit exposure in the same number. WageProof builds that figure from BLS wage data for your role and your county's BLS wage area, and writes down every step of the derivation. The methodology page lays out the data and the steps behind it. If you would rather see the output first there is a sample report; otherwise you can start your own, free to start and about 15 minutes.

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 your specific facts; talk them through with a qualified tax professional.