S Corporation Tax Reduction Tricks

With the March 15 S corporation tax return due date barely a couple of months away, now's a great time to identify any last minute tricks for saving S corporation shareholders taxes. Here are three places to start your search:

Don't Forget Payroll

Be sure if the S corporation has distributed money to shareholders during the year that any working shareholder-employees have been paid at least some wages. Not paying shareholder-employee reasonable compensation may trigger shareholders losing much or all of the benefits of an S corporation if distributions have also been made to shareholders.

If you've been bad about paying shareholder-employee wages, by the way, even categorizing a bit of the money you paid out to shareholders as 2011 wages will reduce your risks substantially.

Some tax practitioners recommend paying at least $7,000 to shareholder-employees to make sure that all of the Federal Unemployment Taxes are paid and that at least some Social Security and Medicare tax is paid.

Finally, note that you don't have to put money into an S corporation just so you can pay shareholder-employee wages. You don't need to pay wages except if you're paying distributions. And paying wages when you're losing money (as sometimes happens) only means more federal and state payroll taxes.

Verify Title

If your S corporation has purchased and plans to depreciate any fixed assets, make sure that the assets are titled in the corporation's name. Why? Only assets the S corporation owns can be depreciated.

By the way, most assets don't have a formal title—and you don't need to worry about this issue for those assets. But vehicles, for example, do have titles. And so if you have purchased a new truck for the S corporation and inadvertently titled the vehicle in your name rather than the corporation's name, re-title the asset if possible so you will actually be able to write the vehicle off.

Reimburse Shareholders

In order to deduct an expense on the corporation's books, you need to make sure either that the corporation initially paid the expense or if shareholders personally paid the expense that the corporation has reimbursed the shareholder. Accordingly, make sure that if there are any expenses shareholder-employees have incurred—auto mileage, business travel, health insurance, and so forth—that these are per the bookkeeping records reimbursed by the corporation in 2011.

Note that normally and ideally you would write a reimbursement check on or before December 31, 2011 to put the transaction into 2011. However, probably your bookkeeper or accountant can accomplish the same result by using a journal entry to re-categorize some distribution the corporation made during 2011 as an expense reimbursement for the year.

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