Examples:

• • ACE Co. funded 100% of employee health plan premiums as tax-free compensation.
  • XYZ Inc. offered 4% 401(k) matching, deducting those contributions.
  • Providing standing desks counted as a deductible employee welfare benefit.
  • Both employer and employee HSA funding reduced ABC LLC’s taxable income.
  • First $50k of group term life premiums for sales staff qualified as deductions.

How to Proceed:

• • Document any premiums, contributions and administrative fees incurred.
  • Adopt formal written plan documents describing scope of benefits.
  • Confirm ownership percentages to assess if premiums count as wages or distributions.
  • Quantify any imputed employee income for non-discrimination testing purposes.
  • Issue W-2s for shareholders owning >2% reflecting premiums as taxable compensation.

FAQs:

• • Is there a limit to employee benefit deductions? Technically no, but “lavish” benefits may not qualify.
  • Can employee salaries include pre-tax health plan deductions? Yes, if structured through a Section 125 cafeteria plan.
  • When are benefit deductions realized? When accrued as liabilities and/or cash is paid out.
  • Can benefits favor owners over employees? Generally no – nondiscrimination testing prevents this.
  • Are fringe benefits subject to payroll taxes? Depends on benefit type and structure.

Examples:

• • Raj’s S corp had $500k of QBI, allowing a 20% deduction of $100k on his 1120-S.
  • Despite $400k QBI, Priya’s law firm couldn’t claim the deduction due to SSTB exclusions.
  • Michael could only deduct 50% of wages since QBI exceeded the $326,600 MFJ threshold.
  • Factoring in UBIA of qualified property let Chris increase his QBI deduction eligibility.
  • With taxable income of $425k, specified service business owners only got a partial QBI deduction.

How to Proceed:

• • Determine if QBI deduction eligibility applies based on industry and income level.
  • Run calculations to assess if wage or UBIA limitations reduce available deductions.
  • Maintain detailed records of shareholder wages and company qualified property.
  • Consider “crack and pack” strategies to split SSTB and non-SSTB activities if applicable.
  • Claim the deduction on Form 1120S and attach statements for each shareholder’s portion.

FAQs:

• • What income counts as QBI? Net business income – not investment income, reasonable compensation or guaranteed payments.
  • Who determines if a business is an SSTB? The IRS designation, based on field and income percentages.
  • Is the QBI deduction allowed for state taxes? Varies by state – some conform to federal law, others add back in.
  • What are the income thresholds? $164,900 for single filers, $329,800 for married filing jointly in 2023.
  • How is UBIA calculated? Usually cost basis minus depreciation for qualifying assets, held at year end.

Examples:

• • Home office occupying 10% of residence let Rebecca deduct that portion of housing expenses.
  • 100% of Ethan’s desk, chair and monitor purchases counted since his office was used solely for business.
  • Nadia expensed 30% of home utility costs since her 300 sq ft office was that percentage of the total square footage.
  • Driving 5,000 business miles at the $0.655 per mile rate gave Ava a $3,275 vehicle deduction.
  • Sam chose actual expense accounting, writing off 80% of his auto loan interest, gas and repairs based on mileage logs.

How to Proceed:

• • Measure home office dimensions and calculate percentage of total residence square footage.
  • Maintain receipts, bills and other documentation for direct and indirect expenses.
  • Track and categorize vehicle mileage between business, commuting and personal use.
  • Determine whether actual expense or standard mileage rate accounting is most advantageous.
  • Satisfy the “exclusive use” requirement for both home office and vehicle deductions.

FAQs:

• • Can home office deductions be claimed in a rental? Yes, based on the percentage of space used exclusively for business.
  • What happens if business use percentage of a vehicle changes? Deductions must be adjusted accordingly.
  • Is home office depreciation deductible? Yes, the home office portion can be depreciated over 39 years straight-line.
  • Can the business own the vehicle? Yes, and all operating costs are fully deductible if 100% business use.
  • What if clients sometimes visit a home office? Still eligible as long as solely used for business otherwise.

Examples:

• • Dinner with top client was 50% deductible for Marco’s S corp, but theater tickets were not.
  • Conference travel including $350 flight, $600 hotel and $200 of meals was fully deductible for Valerie.
  • Renting a car for a 500 mile business trip gave Nick a $327.50 standard mileage deduction.
  • Catering and space for an all-employee holiday party was 100% deductible as a non-owner fringe benefit.
  • Golf outing with vendors wasn’t deductible under new entertainment expense rules.

How to Proceed:

• • Require employees to track and justify travel, meals and entertainment expenses.
  • Enforce an “accountable plan” with receipts, expense reports and excess reimbursement policies.
  • Separate entertainment from business meal costs as the tax treatment differs.
  • Don’t deduct lavish or extravagant expenses that exceed normal business standards.
  • Use the actual expense method for vehicles over 6,000 lbs like SUVs and light trucks.

FAQs:

• • What entertainment expenses still qualify for deductions? Very few after TCJA tax reform – consult a CPA for specifics.
  • Is the 50% meals deduction limit changing? Temporarily increased to 100% in 2021-22 due to Covid relief measures.
  • Do gas costs get added to the standard mileage rate deduction? No, the IRS rate factors in all vehicle operating expenses.
  • Can owners deduct 100% of retreat or company outing costs? Generally no, unless they can clearly justify a primary business purpose.
  • What if a trip has both business and personal components? Only the business percentage of expenses is deductible.

• • • 1. What is the 20% pass-through deduction for S corps called? A) PTE B) QBD C) QBI D) DIQ
    • 2. Which fringe benefit is usually a 100% deductible expense for S corps? A) Public transit passes B) Gym memberships C) Tuition reimbursement D) All of the above
    • 3. What documentation is needed to substantiate home office deductions? A) Expense receipts and bills B) Square footage calculations C) Both expense receipts and square footage calculations
    • 4. What percentage of business meals with clients are deductible? A) 0% B) 25% C) 50% D) 100%
    • 5. When can S corps deduct entertainment expenses after 2017 tax reform? A) Never B) Rarely C) Usually D) Always
    • 6. What eligibility rules apply to the S corp QBI deduction? A) Income thresholds B) SSTB designations C) Wage and property limitations D) All of the above
    • 7. What vehicle expense accounting methods can S corps use? A) Standard mileage rate B) Actual operating costs and depreciation C) Either standard mileage or actual costs
    • 8. What does the IRS require for travel expense deductions? A) Receipts B) Mileage logs C) Business justification D) All of the above
    • 9. Are S corp employee health insurance premiums deductible? A) Yes B) No C) Only for non-owner employees
    • 10. What type of plans can S corps offer for tax-advantaged retirement saving? A) Roth IRAs B) 401(k)s and pensions C) HSAs only
    • 11. What is required for a home office deduction? A) Exclusive business use B) Principal place of business C) Both exclusive use and principal place of business
    • 12. Can shareholder-employees’ non-business meal costs be deducted by S corps? A) Yes B) No C) Only during business travel
    • 13. What is the standard IRS mileage rate for 2023? A) $0.30 per mile B) $0.655 per mile C) $1.00 per mile
    • 14. How does entertainment expense deductibility differ from meals? A) 0% deductible vs 50% B) 50% deductible for both C) 100% deductible for both
    • 15. What do tax reform rules on entertainment expenses apply to? A) S corps only B) C corps only C) All business entities
    • 16. Which employee benefit is typically not deductible for S corps? A) Dependent care assistance B) Adoption assistance C) Lavish retreats D) All of the above
    • 17. What is the QBI deduction income threshold for single filers in 2023? A) $75,000 B) $164,900 C) $250,000 D) $523,600
    • 18. Are S corp charitable contributions deductible? A) Yes B) No C) Only for donations to qualifying nonprofits
    • 19. What does an “accountable plan” require for S corp expense reimbursements? A) Receipts B) Timely reporting C) Returning excess payments D) All of the above
    • 20. How long can home offices be depreciated for? A) 5 years B) 10 years C) 27.5 years D) 39 years
    • 21. What costs are factored into the standard mileage rate? A) Gas B) Maintenance C) Depreciation D) All vehicle operating expenses
    • 22. How do S corps claim the QBI deduction? A) Form 1120S B) Form 8995 C) Form 1065 D) Both Form 1120S and 8995
    • 23. Are club dues deductible business expenses for S corps? A) Yes B) No C) Only for professional associations
    • 24. What limitation often applies to S corp QBI deductions over income thresholds? A) SSTB phase-outs B) 50% of W-2 wages C) Both SSTB phase-outs and 50% of W-2 wages
    • 25. Can S corps deduct the cost of employee parking? A) Yes B) No C) Only for reserved spots
    • 26. What documentation should S corps keep for business meals? A) Receipts B) Attendees C) Discussion topics D) All of the above
    • 27. Can S corps deduct the full cost of employee gifts? A) Yes B) No, limited to $25 per recipient C) No, limited to $100 per recipient
    • 28. What factor can increase S corp QBI deductions over income thresholds? A) SSTB designation B) UBIA of qualified property C) Royalty income
    • 29. Are S corp owner health insurance premiums deductible on Form 1120S? A) Yes B) No, they are reported as distributions C) No, they are reported as W-2 income
    • 30. What is the 2023 QBI deduction income threshold for married couples filing jointly? A) $164,900 B) $329,800 C) $250,000 D) $400,000
    • Answers:
      • • • 1: C) QBI – Qualified Business Income
          • 2: D) All of the above – transit passes, gym fees and education are common fringe benefits
          • 3: C) Both expense receipts and square footage calculations substantiate exclusive business use
          • 4: C) 50% of business meals with clients/prospects are deductible
          • 5: B) Rarely – entertainment expense deductions were largely eliminated in 2017
          • 6: D) Income thresholds, SSTB rules and wage/capital limits all apply to QBI deductions
          • 7: C) Either standard mileage rate or actual vehicle costs can be used
          • 8: D) The IRS requires receipts, logs and business purpose for travel deductions
          • 9: C) S corp owners’ health premiums are generally reported on W-2s, not 1120S
          • 10: B) S corps can offer tax-deductible 401(k) and pension plans
          • 11: C) Home offices must be used exclusively and regularly for business as the principal location
          • 12: B) Only business-related meal costs are deductible, not personal meals
          • 13: B) $0.655 per mile is the 2023 standard IRS mileage rate
          • 14: A) Entertainment is 0% deductible while business meals are 50% deductible
          • 15: C) Entertainment expense reforms apply to all business entities
          • 16: C) Lavish employee retreat costs are often challenged as non-deductible
          • 17: B) $164,900 is the 2023 QBI deduction threshold for single filers
          • 18: C) S corp charitable donations are deductible if made to IRS-recognized 501(c)(3) nonprofits
          • 19: D) Accountable plans require receipts, timely reporting and excess payment returns
          • 20: D) Home offices in residential buildings are depreciated over a 39-year schedule
          • 21: D) The IRS factors all operating costs like gas, maintenance and depreciation into the standard rate
          • 22: D) S corps claim the QBI deduction on both Form 1120S and the related 8995
          • 23: C) Dues for professional groups like bar associations may be deductible, but not social clubs
          • 24: C) Both SSTB phase-outs and the 50% wage limit can reduce S corp QBI deductions
          • 25: A) Employee parking is considered a deductible fringe benefit
          • 26: D) Detailed substantiation with receipts, attendees and discussion topics supports meal deductions
          • 27: B) The IRS caps employee gift deductions at $25 per recipient per year
          • 28: B) The unadjusted basis of qualified property (UBIA) can increase eligible QBI deductions
          • 29: C) S corp owners report health premiums as taxable income on W-2s vs. 1120S deductions
          • 30: B) $329,800 is the 2023 QBI deduction threshold for married joint filers

Disclaimer: The information provided in this article is for general educational purposes only. It is not intended as and does not constitute legal, financial, or tax advice. S corporations and their owners should consult with attorneys, CPAs, and tax professionals to address their specific situations and ensure compliance with all applicable laws and regulations. Tax rules are complex and change frequently. This article is based on federal tax law and IRS guidance as of the date of publication. Some states may have different rules or conformity to federal law. Always consult official IRS publications and professional tax advisors for the most current information and to discuss your particular circumstances. The article author and publisher are not responsible for any errors or omissions, or for the results obtained from the use of this information. Readers are encouraged to confirm the information contained herein with other sources.