Hi,

I am researching the following so that I am better prepared to talk to
my tax advisor.  Therefore, I understand the Google set of legal
limitations.

I am planning on setting up a S Corp whereby my wife has 51% ownership
and I have 49% ownership.

What I would like to know is what I should expect to pay in State and
Federal taxes based $100,000 a year income for the S corp.  I used
$100,000 as an easy way to calculate the percentages. ( I am looking
for Percentages before deductions)

What I can claim as tax deductions such as health insurance, % of home
expenses if I have an office at home, car expenses, travel expenses,
etc. I am looking for a list of suggested expenses, what documentation
is needed to support these expenses when the taxes are filed, what
percentage can be claimed as a tax deduction and how these items should be
set up i.e. in the company's name or not.

Specifically, if my wife travels with me to work say from San Fran to
Washington DC and is providing support services, are her travel
expenses 100% tax deductible?

If I buy a car in my company's name, are the car payments and
maintenance expenses 100% tax deductible.

How should I structure my salary for myself and my wife. (Actual
numbers are needed)

What the watch outs are. A list based on past experiences is what I am looking for.

Ultimately, I am looking for a summary based on a year's income and
expenses in the following format.

$100,000 salary for two
$10,000 (10% for State taxes)
$10,000 (10% for Federal taxes)
$10,000 (10% for SS taxes)
After taxes
$70,000

Deductions

$5000  Health Insurance   (All health expenses are 100% deductible
$6000  Car expenses       (All car expenses 100% deductible if the car
is in the company's name)
$24000 Home expenses including Mortgage (10% is a tax deduction since
the office is 10% of the home space)
Etc.

Thanks,

Your tax owed is calculated based on your personal net income. 
Therefore, you cannot structure the calculation in the way you have
proposed.  Furthermore, the calculation is significantly more complex.

While they may initially appear a bit overwhelming, you should
ultimately read the various IRS Publications I have referenced below. 
They are the most comprehensive source of information on this subject.
 I also recommend "Self-Employed Tax Solutions" by June Walker. 
Although the book is focused on sole proprietorships, most of the same
requirements for meeting various deductions apply (health insurance
being a major difference).

I have addressed each of the areas you asked questions about below.

The IRS requires you to pay yourselves a reasonable salary by industry
standards.  For this reason, I cannot tell you what you should pay
yourselves since I have no idea what industry you are in or what
function you are performing.  This salary is subject to employment tax
of 15.3%, half of which is paid by the employee and half by the
corporation.

"In an S corporation, only the salary paid to the employee-owner is
subject to employment tax. The remaining income that is paid as a
distribution is not subject to employment tax under IRS rules.
Therefore, there is the potential to realize substantial employment
tax savings. Case in point:

Mary owns a print shop. In keeping with the industry standard, Mary
decides that a reasonable salary for a print shop manager is $35,000
and pays herself accordingly. Mary?s total earnings for the year are
$60,000: $35,000 paid in salary and the remaining $25,000 paid as a
distribution from the S corp. Mary?s total employment tax is $5,355
(15.3% of $35,000).

If Mary were the owner of an LLC, she would have to pay employment tax
on the entire $60,000, equaling $9,180. But as an S corporation, she
realizes savings of $3,825 in employment tax.

One might assume that these savings could be further manipulated by
reducing the salary to an extremely low amount and attributing the
rest of one?s earnings to distributions?but this would be an incorrect
assumption. In practice, the IRS is careful to notice whether a salary
is reasonable by industry standards. If it determines a salary to be
unreasonable, the IRS will not hesitate to reclassify distributions as
salary."

So, your taxable income results from your salary plus any remaining
profit left in the S Corporation after it deducts your salaries and
all other available deductions.

"S Corp. vs. LLC: Which Structure is Right for Your Business" by
Chrissie Mould, PowerHomeBiz.com (January, 2006)
http://www.powerhomebiz.com/vol136/structure.htm

Tax brackets and their implications are provided at "Home Business Tax
Deductions: Keep What You Earn" by Stephen Fishman, Nolo (2006)
http://www.nolo.com/product.cfm/ObjectID/0EB8204C-4889-4C7B-B44E88BC75A06BB3/sampleChapter/5/111/277/#summary

"To be deductible, a business expense must be both ordinary and
necessary.  An ordinary expenses one that is common and accepted in
your field of business.  And necessary expenses one that is
appropriate and helpful for your business.  An expense does not have
to be indispensable to be considered necessary."

"Self-employed Tax Solutions" by June Walker, The Globe Pequot Press (2005) page 27

Provided that the S corporation purchases the health insurance policy,
it is deductible as compensation by the S Corporation.

"Health insurance premiums paid by an S corporation for most
shareholders are deductible by the S corporation as compensation and
included on the shareholder?s Form W-2. However, most shareholders can
deduct the health insurance premiums paid by the S corporation as an
above-the-line deduction on Form 1040.

...[T]he IRS has taken the position that an S corporation's sole
shareholder-employee cannot buy health insurance in his/her own name
and get an above-the-line deduction for the premium expense. Rather,
only insurance purchased by the corporation qualifies.

Some states do not allow a corporation to purchase a group health plan
with only one participant, e.g., an S corporation's sole
shareholder-employee. In this situation, the S corporation
shareholder-employee may be forced to purchase the plan in his/her own
name.

If you are in this situation, contact your BKD advisor, who may be able to help.

This guidance is not binding on taxpayers. Rather, it merely reveals
the IRS position. The IRS is not always right in such matters, but it
is important to know what the IRS thinks about this issue.

One way to avoid this situation is to employ your spouse or child as a
bona fide employee of the S corporation. If state law then allows the
S corporation itself to purchase the plan because the group health
plan covers more than one participant, the S corporation can establish
a plan to provide medical care coverage, and the sole shareholder can
get an above-the-line deduction for the premium expense."

"Tax Alert" BKD (June 26, 2006)
http://216.239.51.104/search?q=cache:jdfQKYc3ayQJ:www.bkd.com/service/tax/Tax_Alert/+self-employed+s+corporation&hl=en&gl=us&ct=clnk&cd=28

Automobile expenses are deductible as a percentage of business use or
on a flat mileage basis.

"Car and Truck Expenses" Publication 583, IRS, page 11
http://www.irs.gov/pub/irs-pdf/p583.pdf

Business use of your home is subject to depreciation as well as
expenses that are deductible in full at the time they are incurred. 
So, you cannot simply take a percentage of your monthly mortgage
payment.  Only the interest expense portion is applicable, which
gradually declines each month under conventional mortgages.  You are
correct that the deduction is based on the square footage of the area
exclusively used for business.  There are a variety of rules regarding
business use of the home, described in "Depreciation" and "Business
Use of Your Home" in Publication 583, IRS, pages 10-11
http://www.irs.gov/pub/irs-pdf/p583.pdf.  Publication 587 provides
more details and is available at
http://www.irs.gov/pub/irs-pdf/p587.pdf.

S Corporations file Form 1120S.  The instructions for Form 1120S
indicate that travel expenses for your spouse cannot be deducted
unless your spouse is an employee and her travel is for a bona fide
business purpose.  Assuming you meet this restrictions, it is fully
deductible.

"Travel" Instructions for Form 1120S, IRS, page 16
http://www.irs.gov/pub/irs-pdf/i1120s.pdf.  Additional information on
Travel and Car Expenses can be found in Publication 463, available at
http://www.irs.gov/pub/irs-pdf/p463.pdf
 
"Recordkeeping" Publication 583, IRS, pages 11-23
http://www.irs.gov/pub/irs-pdf/p583.pdf provides detailed examples of
the records your business should keep.  Receipts or other applicable
records are typically required to document deductible expenses.

In conclusion your tax calculation looks something like this:

You each pay state and federal income and payroll taxes on your
salaries.  You also pay state and federal income tax on any
distributions from the S Corporation.

The S Corporation distribution is determined by taking gross income,
subtracting expenses such as health insurance, car expenses, home
office deductions including depreciation, and all other business
expenses.

The critical items to watch for are:

ensuring your home office space meets the applicable requirements.

properly classifying capital expenses that must be depreciated versus
expenses that can be immediately deducted in full.

properly accounting for the business/personal usage of the car and
apportioning the deduction accordingly.

paying yourselves a defensible salary rather than trying to
excessively reduce payroll tax.

buying health insurance through the S Corporation.

keeping appropriate records.

distributions of profits from the S corporation must be distributed
according the stock ownership percentage of the owners.

I hope this information is helpful to you and that you appreciate why
a calculation of the form you propose is not possible given that the
situation is much more complex.

Sincerely,

Wonko

Search terms:  s corporation tax deductions; self-employed s corporation

Answers to questions
---------------------
I am planning on setting up a S Corp whereby my wife has 51% ownership
and I have 49% ownership.
--> ok

What I would like to know is what I should expect to pay in State and
Federal taxes based $100,000 a year income for the S corp.  I used
$100,000 as an easy way to calculate the percentages. ( I am looking
for Percentages before deductions)
-->You save money by having an S-corp although maybe not as much as
people initially think. Say you earn 100k and pay 30% total payroll
taxes so your net is 70k. Then out of that (ie. after tax) you pay for
computers (5k), trips to tradeshows (5k), car lease (6k) and
cellphone/office supplies (4k) to work from home as a computer
programmer. Your net after all these expenses is 50k.  In an S-Corp
the revenue would be 100k, and you would pay these expenses pre-tax
leaving 80k. Then you take a 40k salary and 40k distribution. You pay
30% taxes on the salary (12k) + 25% on the distribution (10k) so 22k
in taxes. Therefore you are left with a net of 58k. However you did a
bunch more paperwork/afmin/document filing for the pleasure of the 8k
and you had to pay state tax (minimum in CA is $800), company
insurances, accountant fees etc. You actually do not save too much
money with only 100k revenue (maybe 300k makes it worth it). My
accountant sweetly puts it as 'you spend more money to pay less
taxes!!"


What I can claim as tax deductions such as health insurance, % of home
expenses if I have an office at home, car expenses, travel expenses,
etc. I am looking for a list of suggested expenses, what documentation
is needed to support these expenses when the taxes are filed, what
percentage can be claimed as a tax deduction and how these items should be
set up i.e. in the company's name or not.
--> An S-corp cannot claim a home office, though can claim a portion
of utilities if you work out of hime (as opposed to a sole proprieter
who can claim  a home office and portion of the mortgage). Everything
else you state is ok as long as it is a real business expence (a
somewhat gray area). For example for a trip you should keep info on
why you went, who you ment, what potential or real business comes out
of the trip etc. This should be filed at your home office in a trip
report to be sure the IRS will allow the deduction if they audit you.
Note supposedly S-corps are audited more frequently and expenses are
number 1 thing to look at for IRS. Re % of an expense that is
deductable, the way I do it is fill in an expense form and the company
reimburses me 100% of what I spend. The items get booked into the G/L.
At the end of the year the accountant goes through the accounts and
creates a tax return with the correct % of what can be claimed. For
example I think only 50% of meal expenses can be claimed as pre-tax
deductions.


Specifically, if my wife travels with me to work say from San Fran to
Washington DC and is providing support services, are her travel
expenses 100% tax deductible?
-->Yes if its real, but the IRS may claim its not real. You need
strong justification wshe is needed on the trip.

If I buy a car in my company's name, are the car payments and
maintenance expenses 100% tax deductible.
-->Yes, if its used 100% for business. An IRS audit will not believe
this unless you have another car in your name which is your personal
vehicle.

How should I structure my salary for myself and my wife. (Actual
numbers are needed)
-->36k you, 12k your wife. Everything else should be a distribution to
avoid to 5.9% employee/employer payroll taxes.

What the watch outs are. A list based on past experiences is what I am looking for.

Ultimately, I am looking for a summary based on a year's income and
expenses in the following format.

$100,000 salary for two
$10,000 (10% for State taxes)
$10,000 (10% for Federal taxes)
$10,000 (10% for SS taxes)
After taxes
$70,000

Deductions

$5000  Health Insurance   (All health expenses are 100% deductible
$6000  Car expenses       (All car expenses 100% deductible if the car
is in the company's name)
$24000 Home expenses including Mortgage (10% is a tax deduction since
the office is 10% of the home space)
Etc.

Thanks,




---------------------------------------------------------------------------

Heres a real-life example from a non-CPA S-corp company owner. All the
info is based on my opinion and experience of running an S corp.
Others may disagree with me. See an accountant before relying on
anything I say below. FYI, my S-corp business is based in California. 
Here is the formula for how it all works:

SCORP
Income into S-corp:    $A
Business expenses     ($B)
Salary                ($C)
State taxes           ($D)
S-corp profit          $E
Distribution to owner  $E

OWNER
Owners earned income  $C+$E  = $F
Owners personal deductions    ($G)
Owners net income to be taxed  $H     this is ($F - $G)
Taxes                          $I     

SCORP example
1.  so $A is $100k - you decided that
2.  $B is reasonable business expenses which can include:
    - office rent (but not for a home office - S corps are not allowed these)
    - utilities (internet connection, gas, electric, phone, cell,
etc.). If you work at home you can claim a portion of the home utility
bills even though you CANNOT claim a home office.
    - car lease or bond payments, insurance, taxes etc. to the extent
you use the car for biz. If you have a separate personal car then it
may be reasonable for you to buy a car that you use 100% for business
and have the S-corp pay all the expenses. Otherwise you have to
pro-rate them (if 50% personal, 50% business the S-corp can only pay
50% of the expenses). ALternatively use you personal car for business
trips, keep a log of your trips and bill the S-corp for mileage (via
expenses)
    - other business expenses - marketing, biz cards, ads, business
meals and meetings, business trips, trade journals, industry-specific
items (ie. my computer business buys PCs, printers, network equipment,
software, LCD display screens, stationary, office supplies (toilet
paper, soap, drinks, snacks, etc.)
3. $C is your salary. For most S-corps $40k salary is reasonable.
4. $D - In California you will always pay min $800 state taxes but on
$100k I expect you would pay about $2k state taxes.
5. $E - so if we assume you deducted about $12k business expenses your
net income is $100k - $12k - $40k - 2k = $46k.
6. You write yourself a check from the S-Corp for $46k as a
distribution to the onwer. Note a wise accountant will tell you to pay
a 401k/SEPIRA/SIMPLE-IRA retirement amount from the S-Corp before
writing yourself a distribution but I have not included that here.

OWNER example
1. $F - Your earned income is $40k salary and $46k distributions = $86k
2. $G - Your personal deductions are the same for anyone else. You can
also deduct health insurance premiums here and medical expenses to
reduce you income somewhat. Assuming $500 per month premiums and $2000
medical expenses that is $8k off the top.
3. $H - Assuming you have another $5k of deductions your net income to
be taxed would be $86k - $13k = $73k
3. $I - You pay federal/state taxes on $73k. Notes some of the amount
due was already paid when you received wages and is listed on your W2.
You pay the difference.

A couple of notes.

- you have to pay taxes. An S-corp allows you to pay less taxes as
long as it is a real business with real income and real expenses.
- The main way you save on taxes is paying yourself a lower salary and
higher distribution (saving 5.9% payroll taxes on the distribution
amount).
- A secondary way you save on taxes is putting through reasonable
business expenses and paying them with pre-tax money. Here an
accountant can really help you but note if the IRS audit you this is
one of the main areas they will scrutinise. Some S-corp owners heavily
abuse this by putting personal stuff through as business expenses -
expect a big fine if you ever get caught doing this - I suggest you
keep everything very very well documented if it is a business expense.
- as all the profit from an S-corp flows into your personal income, it
makes no sense to complicate your S-corp ownership with you and your
wife (assuming you file taxes jointly). I cannot think of any scenario
where you will save money by both being 50% owners instead of one of
you owning 100% of everything. (Note your spouse implicetly owns 50%
of everything you own anyway).
- you should spend half hour free with an accountant to discuss your
S-corp plans. In my opinion,  a large number of accountants are
structured as S-corps and understand the tax situation much better
than me. We are a computer consulting businesses.
- So you save taxes by taking a low salay! Re how low a salary can you
take, heres what my accountant told me - a "reasonable" salary is
around $40k per year. The IRS used to penalize owners of C corps for
too high a salary (to avoid double taxation) so have somewhat of a
problem reversing their position and chasing too low a salary (as long
as its not ridiculous). So the $40k annual salary amount is probably
ok for most professions.

Hope this helps you,

Paul