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Simplifying Your S Corporation Accounting

By Stephen Nelson

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Published: 10Mar2009
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An S Corporation can save your small business lots of tax. With an S corporation, for example, you typically avoid paying corporate income tax at both the federal and state level. Furthermore, with an S corporation, you also usually minimize the payroll taxes associated with shareholder-employee wages. That's the good news.

But there's bad news, too. An S corporation also often complicates your accounting. That's a bummer. Fortunately, you can often employ one or more of the following tricks to simplify and ease the bookkeeping burden of operating a small Subchapter S corporation:

S Corp Accounting Trick #1: Annual Payroll for Shareholder-employees

If you're a one-man or one-woman S corporation--in other words, if the shareholder-employee is the only employee receiving wages--you can often simplify your payroll bookkeeping by processing payroll just once a year.

For example, rather than pay yourself a $3,000 a month salary, you can pay yourself a $36,000 annual salary at the end of the year.

Using an annual payroll cycle rather than, say, a monthly or biweekly cycle, reduces the number of times you need to process payroll checks and made payroll deposits. Using an annual payroll cycle also means that you'll simplify your quarterly payroll returns--for most quarters, the return will only show zeroes.

S Corp Accounting Trick #2: Over-withhold from Shareholder-employee Wages

Because an S corporation's income flows through to the shareholder's personal tax returns, the shareholders need to pay the income taxes owed on their shares of that income. That's sort of bummer because then, typically, shareholders need to make quarterly estimated tax payments.

One trick that should be considered, however, is boosting the federal income taxes withheld on the shareholder-employee's wages. In other words, rather than make $3,000 a quarter estimated tax payments, the shareholder-employee could boost his or her payroll withholding by $12,000 a year.

S Corp Accounting Trick #3: Keep Cars Out of the Business

Making an S corporation the owner of a vehicle used inside the S corporation creates bookkeeping complexity. And, if you're honest about your personal-versus-business use of a vehicle, such a technique saves very little tax.

Here's why: What the S corporation is supposed to do is track the personal use of the vehicle and then charge shareholders or employees for that personal use--perhaps by recognizing amounts as extra wages. Yuck. That's way too complicated for most small business corporations.

Many S corporations, therefore, can simplify their accounting by not putting cars inside the corporation. Instead, the S corporation can reimburse the shareholder-employee for business use of an auto using the standard mileage rate--just as it may reimburse non-shareholder employees.

S Corp Accounting Trick #4: Don't Get Too Aggressive About Capitalizing Assets

Textbook accounting says that you're supposed to capitalize any assets you purchase. Those assets then appear on the balance sheet and, over time, get depreciated.

That sort of accounting all makes sense. But you need to be careful that you don't go overboard on capitalizing assets.

Tax laws allow you to depreciate immediately (write off immediately) the costs of most assets used in a profitable business. And so you want to do that as much as you can. In other words, don't capitalize the $25 chair. Or the $150 lamp. Or even the $500 computer. Instead, write off this stuff as "office supplies" expense or use (with your CPA's help) the Section 179 election to depreciate this stuff in the year you purchase.

You should, by the way, confer with your tax advisor about how you implement trick #5. But what you want to avoid is a situation where, after a few years, you have hundreds of nickel and dime items (pencil sharpeners, lamp shades and even old computers) littering your balance sheet.

CPA Stephen Nelson specializes in saving taxes for businesses and their owners. Nelson practices public accounting in Seattle, WA. He also edits the do-it-yourself S corporation web site and do-it-yourself business incorporation web site.

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