The choice of a corporate tax structure should be a conscious decision, not taken lightly. Far too often, business owners make this choice without proper preparation for the transition or establishment, and they don't take any action immediately after organizing or transitioning to this tax structure. This can result in significant missed opportunities, leading to lost expense deductions, increased income, and an impact on the amount of personal tax liability.
Here are some key points that should be carefully considered and prepared for in advance:
1 Salary: All working owners of S corporations must receive an official salary, file payroll tax reports and pay payroll taxes.
2 Distributions: It's essential to understand how an S corporation owner can take money out of the company. What are distributions? What is the correlation between the salary amount, distributions, and business profit?
3 Income and Expense Tracking: Regular, on-time income and expense tracking are crucial to have a complete and timely picture of your profit.
4 Vehicle Expenses: since corporations cannot cover expenses for your personal vehicle, even if you use it solely for business purposes, you need to familiarize yourself with the options for deducting vehicle expenses in your situation.
5 Home Office, Phone, and Internet Expenses: The situation is similar to that of vehicles. You need to know the nuances and organize everything correctly in advance to avoid losing deductions.
6 Health Insurance for Owners: There are certain rules about when you can deduct owner's health insurance payments as a business expense. Failing to follow these rules can result in losing the deduction, even if the insurance payment is paid from a business account.
7 For trucking businesses: You need to familiarize yourself with the rules for deducting meal expenses while on trips. They are different from those for sole proprietorships.
8 Deducting Business Expenses Paid from Personal Accounts and Credit Cards: To avoid losing such deductions, you need to follow the existing rules.
These are some of the most common mistakes made by new S corporation owners. Often, these errors cannot be corrected retroactively, so everything must be planned and done in a timely manner.
