Here are some tax-saving strategies for S Corporations in the US in 2023:
- Pay reasonable salaries to shareholder-employees: S Corporations can pay modest but justifiable salaries to shareholder-employees to reduce their self-employment tax burden. For wages paid in 2023 to an S corporation employee, including an employee who also happens to be a shareholder, the FICA tax wage withholding rate is 7.65% on the first $160,200 of wages: 6.2% for Social Security tax and 1.45% for Medicare.
- Maximize tax deductions: S Corporations can deduct various business expenses, such as salaries, wages, bonuses, rent, utilities, and supplies. Deducting these expenses can reduce taxable income and lower tax liability. It’s essential to keep accurate records and ensure all deductions are legitimate and necessary.
- Consider issuing new loans at the Applicable Federal Rate (AFR): Issuing new loans to shareholders that charge exactly the AFR can avoid triggering current tax liability.
- Eliminate high-interest loans: Encourage shareholders to pay off existing high-interest loans by having the shareholder pay them off.
- Ensure proper documentation and repayment: The loan should be properly documented, including a written instrument such as a promissory note with stated interest, payment terms, conditions, and maturity date. Additionally, the shareholder should repay the loan to the S corporation.
- Comply with shareholder loans best practices: Keep track of shareholder loans, ensure that loans meet the requirements for S corporation basis, and follow the strict process for issuing shareholder loans.
- Explore tax credits: Business owners can claim both credits and deductions, as long as they meet the necessary qualifications. Some tax credits that many business owners may be eligible to claim on their 2023 tax return include the research and development (R&D) tax credit, the Work Opportunity Tax Credit, and the Retirement Plans Startup Costs Tax Credit.
It's important for S Corporation shareholders to consult with a tax professional or financial advisor to ensure compliance with these strategies and adherence to IRS regulations when saving taxes in 2023.?
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