How to lessen pass thru tax for S corp

Max out your SEP

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Reinvest in business and raise your basis

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Is this the general idea of how basis is determined if one were to sell an S-corp or other sole owner biz?

Essentially determining the basis of all assets and invested capital to approximate capital gain/loss on a sale?

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How to lessen pass thru tax for S corp

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It's time for LSUFanHouston's Number 1 tip for reducing income taxes.

Are you ready? Here it is:

1) Earn less money

But seriously, with S Corps, you are paying tax at your personal rate on net taxable income from the S Corp (I assume you are not talking about payroll taxes... as the idea there is simple... pay yourself as small a salary as can be determined to be "reasonable" and take out more in distributions... you still pay income tax but reduce payroll tax).

So, you need to get as many expenses legally into the S Corporation as you can. This includes having the company reimburse you for business expenses you pay for with personal funds. But the best way to do this is to avoid reimbursements as much as you can by ensuring you are using your business checking account and/or business credit card to pay for all your business expenses.

Hopefully you are using an accounting software package such as Quickbooks, Zero, Wave, etc. If you are... and you are running all your expenses through the company checking account / credit card, then you should be picking up everything.

How many employees do you have? There are some other supercharged possibilities like cash balance plans / traditional pensions... but if you have a bunch of employees you need to offer those to them as well if they meet certain conditions.

How are you handling health insurance?

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Is this the general idea of how basis is determined if one were to sell an S-corp or other sole owner biz?

Essentially determining the basis of all assets and invested capital to approximate capital gain/loss on a sale?

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This is an oversimplification, but basis for a S Corp / Partnership / sole prop is:

Initial Amount invested
Plus business profits
Less business losses
Plus additional amounts invested
Less distributions

It's a little more tricky if you have debt and/or have used up all your basis taking losses.

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A business owner who netted close to $2MM a year of profit and working roughly 50-60 hours a week with very little time off was paying himself a whopping $40k/year. The rest of his...healthy...income was from distributions.

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There is just no way. I’ve seen recommendations of 60/40 or even 50/50, income/distributions, but there is no way someone making $2 million a year is getting away with 2/98. The IRS is not going to let someone so transparently avoid 40-50 thousand in payroll taxes.

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Not sure if you've run into this or not Houston (probably have) but I have had to encourage several of my clients to pay themselves a larger salary for this very reason/definition.

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It's funny. I have some that want to pay themselves min wage (or less) and take the rest out on distributions.

I have others that seem to be hooked to the "certainty" of payroll and more specifically payroll tax withholding.

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I’ve always been told you should be paying yourself on the low end of what it would cost to hire someone to do your job.

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This is similar to what I advise. As an S Corporation Shareholder-Employee, you need to "pay" yourself as an employee and as a shareholder.

The employee pay portion is the time you spend "in" your business - doing the day to day stuff that represents what the business does. So if you own a landscape company, that would be the time you are managing crews, or cutting grass yourself, etc. You should pay yourself about whatever it would cost to hire someone to do that work.

The shareholder "pay" portion is the time you spend "on" your business. This is your management and development of the business as a whole, your leverage from using employees, and a return of the capital you have invested. All of these things directly contribute to your net profit and distributions of net profit are appropriate.

Personally for a 1 shareholder company with a few regular employees, I like to see at least 1/3rd of total compensation run through payroll.

Where there is a real issue is s corps with only one employee - the shareholder. Because if you are the only employee, it's harder to separate the employee role from the owner role. In those cases, I like to look at, if the person was an employee of another company, what would they be paid? Use that as a base for salary.