Small Business Taxes: How Business Structure Affects Tax Deductions

Business owners need to structure their business to take advantage of tax deductions and employment benefits.  The right business structure will also limit the liabilities of the owner and protect his or her personal finances from the business.  Nellie Akalp through her article at compares incorporations and LLCs relative to their respective allowable tax benefits and reporting requirements.  As the tax season is upon us, Akalp presents a guide for business owners outlining expenditures that are tax deductible.  She lists health care benefits, retirement plans and education costs of employees as sources of tax relief.  Read more about the qualifying provisions to these deductions below.

Health Care Deductions

It’s no secret that health care costs are a major expenditure for businesses and individuals alike. A C Corporation is able to deduct 100% of the health insurance it pays for its employees, including those employees who are shareholders. A corporation can also fully deduct the costs of any medical reimbursement plan. And employees of a C Corporation are not taxed on the health benefits they receive.

Retirement Plans

C Corporations and S Corporations (and LLCs electing pass-through treatment) may offer retirement plans to employees, including shareholder employees. Specific plans include:

  • SEP plans (where the Corp can make large contributions to employee IRAs)
  • Simple IRAs (with low employee contributions and employer matching contributions)
  • 401K (with higher contribution limits)

Be aware that with the S Corporation, shareholder-employees receive retirement plan benefits based on earned W2 income, and not their shares of the corporation profit.

Miscellaneous Fringe Benefits

Employees of S Corporations and LLCs must treat certain fringe benefits as taxable income, while employees of C Corporations may receive these benefits tax-free. Examples of these fringe benefits are:

  • Moving expense reimbursements
  • Employer-provided term insurance
  • Some transportation expenses (i.e. parking, public transportation passes)
  • Meals and lodging for employer’s benefits
  • Qualified achievement awards

Employee Education

A C Corporation is able to deduct qualified employee education costs. The S Corp can also deduct certain education costs by considering them a ‘working condition fringe benefit.’

Corporation Losses

The S Corp (and LLC electing pass-through treatment) is more attractive to those individuals who want to claim business losses on their personal income returns. In the C Corporation, losses are held and aren’t passed through to shareholders. Even with the S Corp, keep in mind that you can personally deduct only corporate losses that you fund. Any losses that are funded by the bank in a direct loan from the bank to the corporation are not deductible on your personal income statement. …

Photo by Celeste Cota

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