As the year draws to a close, it’s essential for S-Corporation (S-Corp) owners to refine their tax strategy and make informed decisions that minimize liabilities and optimize financial health. Year-end tax planning isn’t just about compliance; it’s about leveraging the unique tax advantages of your S-Corp to achieve long-term financial goals.

This guide outlines actionable steps, offers relevant statistics, and incorporates diverse perspectives to help S-Corp owners navigate year-end tax planning effectively.

1. Review Your Salary vs. Distributions

One of the defining features of an S-Corp is the ability to pay yourself a reasonable salary while taking additional income as distributions. This dual-income structure helps reduce self-employment taxes.

2. Maximize Retirement Contributions

Contributions to retirement plans are a powerful tool for reducing taxable income. S-Corp owners can contribute through:

• 401(k) plans: Up to $22,500 (or $30,000 if you’re 50 or older) in 2025.
• SEP IRAs: Contributions up to 25% of salary, capped at $66,000 for 2025.

3. Prepay Deductible Expenses

Cash-basis taxpayers (which include most S-Corps) can reduce their taxable income by prepaying deductible expenses like:

• Office supplies
• Subscriptions or software licenses
• Marketing expenses

4. Check Your Health Insurance Arrangements

S-Corp owners who offer health insurance to themselves and their employees can claim a deduction for premiums. If your S-Corp pays health insurance directly, the premiums must be included as part of your W-2 wages to qualify for the deduction.

5. Optimize Depreciation Deductions

The IRS allows S-Corps to take advantage of accelerated depreciation through:

• Section 179 Deduction: Deduct up to $1.16 million on qualifying equipment purchased in 2025.
• Bonus Depreciation: Deduct 80% of the cost of new or used assets in the first year of use.

6. Utilize the Qualified Business Income (QBI) Deduction

S-Corp owners may qualify for the 20% QBI deduction, introduced under the Tax Cuts and Jobs Act. This deduction reduces taxable income for pass-through entities, subject to limitations on income level and business type.

7. Evaluate Employee Benefits and Bonuses

Year-end is the perfect time to review employee bonuses and benefits. Bonuses paid before December 31 are deductible in 2025, and offering fringe benefits like education assistance can further reduce taxable income.

8. Perform a Comprehensive Tax Projection

Run a tax projection to estimate your 2025 tax liability. Doing so allows you to identify potential shortfalls or overpayments and adjust accordingly.

9. Charitable Contributions and Donations

Donating to qualified charitable organizations can yield significant tax benefits. S-Corps can deduct cash donations up to 60% of adjusted gross income or 30% for non-cash donations like equipment.

10. Revisit State and Local Tax (SALT) Deduction Workarounds

While the federal SALT deduction cap remains $10,000, some states offer SALT workarounds for pass-through entities like S-Corps. These programs allow businesses to pay state taxes at the entity level, bypassing the federal limitation.

11. Prepare for 2026 Tax Law Changes

Many provisions under the Tax Cuts and Jobs Act, including the QBI deduction, are set to expire in 2026 unless extended by Congress. Start planning now to mitigate future tax increases.

12. Conduct a Shareholder Distribution Analysis

Ensure that shareholder distributions do not exceed the S-Corp’s accumulated earnings and profits. Distributions beyond these limits may be subject to additional taxes.

13. Invest in Professional Tax Advisory Services

Year-end tax planning can be complex, especially for S-Corp owners managing payroll, distributions, and retirement contributions. A qualified tax preparer can help you maximize deductions, remain compliant, and save time.

 

Conclusion

Year-end tax planning is a vital exercise for S-Corp owners aiming to maximize savings and prepare for the future. By leveraging deductions, optimizing income strategies, and staying proactive, you can significantly reduce your tax burden while enhancing your financial stability.

Contact us today to ensure your 2025 tax strategy is on track.