Contents
- Reasonable compensation: your #1 savings lever and #1 exam risk
- Health insurance for >2% shareholders (Notice 2008-1 mechanics)
- Fringe benefits: what becomes taxable to owners
- Retirement planning: Solo 401(k) vs SEP + SECURE 2.0 traps
- Timing: 12-month rule, 179, bonus depreciation
- Washington state overlays: B&O, capital gains, no PTET
- 2025 strategic compliance checklist
1) Reasonable compensation: balance FICA savings and audit risk
The S corp’s defining tax advantage is the wage/distribution split: wages are subject to FICA, while distributions generally are not. The IRS enforces “reasonable compensation” to prevent owners from stripping payroll tax by underpaying wages. The report emphasizes there is no IRS safe-harbor percentage; defensibility comes from method + documentation. :contentReference[oaicite:2]{index=2}
Cost approach
“Many hats” weighting: split duties by hours, apply market rates per role, sum to a defensible wage. :contentReference[oaicite:3]{index=3}
Market approach
Benchmark your role using credible surveys (industry, region, company size). Strong audit posture. :contentReference[oaicite:4]{index=4}
Income approach
Independent investor test: show investors still receive a compelling return after salary. :contentReference[oaicite:5]{index=5}
Hidden trade-off
Suppressing wages can backfire by reducing retirement contribution capacity (many plans link limits to W-2 wages) and by reducing (or limiting) the 199A deduction when wage-based caps apply. :contentReference[oaicite:6]{index=6}
2) >2% shareholder health insurance: do it “the IRS way”
Health insurance for >2% shareholders is one of the most misunderstood S corp areas. The report walks through the “established plan” requirement (direct pay or same-year reimbursement) and the W-2 reporting sequence: include premiums in Box 1 wages, but not Boxes 3/5, so the shareholder can take the above-the-line deduction on Form 1040 while avoiding FICA on the premiums. :contentReference[oaicite:7]{index=7}
HSA note
The report details how S corp-funded HSA contributions for >2% shareholders often need special handling (Box 1 inclusion), and why owners generally can’t use cafeteria-plan salary deferrals like rank-and-file employees. :contentReference[oaicite:8]{index=8}
3) Fringe benefits: owners don’t get the same exclusions
The report highlights that >2% shareholders are treated like partners for fringe benefit purposes—meaning several benefits that are tax-free to employees become taxable W-2 wages for owners (e.g., certain group-term life, transportation benefits, meals/lodging exclusions). On the flip side, some working-condition and de minimis benefits remain viable. :contentReference[oaicite:9]{index=9}
4) Retirement planning: SECURE 2.0 changed deadlines—but not for S corp deferrals
Retirement contributions can be the single largest “tax shelter” for S corp owners. The report contrasts SEP-IRAs (employer-only, 25% of W-2 wages) with Solo 401(k)s (employee deferral + employer profit-sharing), often allowing materially higher contributions at lower salaries. It also emphasizes the key trap: while SECURE 2.0 relaxed plan adoption timing, S corp owners still need a written salary deferral election in place by December 31 to make employee deferrals for that tax year. :contentReference[oaicite:10]{index=10}
5) Timing strategies: the 12-month rule + depreciation levers
For cash-basis S corps, timing drives outcomes. The report explains the 12-month rule for certain prepaid expenses (deduct now if the benefit doesn’t extend beyond 12 months and doesn’t extend past the end of the next tax year), plus year-end mechanics for Section 179 and bonus depreciation—especially the “placed in service” requirement. It also notes the scheduled bonus depreciation phase-down for 2025 unless Congress changes it. :contentReference[oaicite:11]{index=11}
6) Washington state frontier: “no income tax” still has teeth
The report uses Washington as a case study in modern state complexity: B&O is a gross receipts tax (wages don’t reduce the tax base), market-based apportionment can shift tax out of WA for non-WA customers, and WA’s capital gains excise tax can apply to long-term gains that flow through or arise on exit events. It also points out WA has no personal income tax and therefore no PTET election, so multi-state PTET strategy becomes about other states—not WA. :contentReference[oaicite:12]{index=12}
2025 strategic compliance checklist
- • Set reasonable comp using a real method (cost/market/investor) and keep workpapers. :contentReference[oaicite:13]{index=13}
- • Run final payroll and ensure officer wages hit the defensible target. :contentReference[oaicite:14]{index=14}
- • Health premiums: pay/reimburse within the year and report correctly on W-2 Box 1 (not 3/5). :contentReference[oaicite:15]{index=15}
- • Solo 401(k): sign deferral election by Dec 31 (S corp owners can’t retroactively elect deferrals after year-end). :contentReference[oaicite:16]{index=16}
- • Use the 12-month rule for eligible prepaids; confirm the benefit window. :contentReference[oaicite:17]{index=17}
- • For equipment/software, confirm “placed in service” before Dec 31 for 179/bonus. :contentReference[oaicite:18]{index=18}
- • WA: review apportionment, B&O exposure, and capital gains excise implications early. :contentReference[oaicite:19]{index=19}