# Reference — Business Tax Optimization (US & Canada) ## Contents - US: S-corp vs sole proprietorship worked math - US: retirement plan comparison - US: home office and vehicle deductions done right - Canada: salary vs dividends worked math - Canada: passive-income SBD grind table - Canada: common CCA classes - Year-end checklist (both countries) - Gotchas ## US: S-corp vs sole proprietorship worked math Assumptions: single owner, all profit is SE income, SS wage base not exceeded, ignoring state tax and the QBI interaction (model those before deciding). SE tax ≈ 15.3% on 92.35% of net profit; S-corp pays 15.3% FICA only on salary. | Net profit | Sole prop SE tax | S-corp (reasonable salary) | FICA on salary | Payroll/admin cost | Approx. annual saving | |---|---|---|---|---|---| | $60,000 | ≈ $8,478 | salary $45,000 | ≈ $6,885 | $1,500 | ≈ $93 — **not worth it** | | $120,000 | ≈ $16,955 | salary $70,000 | ≈ $10,710 | $1,500 | ≈ **$4,745** | | $200,000 | ≈ $23,000 (SS capped) | salary $90,000 | ≈ $13,770 | $1,500 | ≈ **$7,700** | Break-even sits around $50–80k profit. "Reasonable salary" = what you'd pay a stranger for the same role — document comparables (BLS data, job postings). Election deadline: Form 2553 by March 15 for the election to apply to the current calendar year (late-election relief exists but don't plan on it). ## US: retirement plan comparison | Plan | 2026 shelter potential | Best for | |---|---|---| | Solo 401(k) | $24,500 deferral + ~25% of compensation employer piece | Owner-only, wants max shelter at moderate income | | SEP-IRA | ~25% of compensation only | Simplicity; no employee deferral piece | | Traditional IRA | $7,500 | Fallback only | At $70,000 S-corp salary: Solo 401(k) ≈ $24,500 + $17,500 = **$42,000 sheltered** vs SEP ≈ $17,500. The S-corp salary choice directly caps the employer piece — factor it into the salary decision. ## US: home office and vehicle deductions done right **Home office** (self-employed; exclusive + regular use required): - Simplified method: $5/sq ft up to 300 sq ft = max $1,500 — zero recordkeeping beyond square footage. - Actual method: business-use % × (rent or depreciation, utilities, insurance, repairs). A 150 sq ft office in a 1,500 sq ft home = 10% of eligible costs — usually beats simplified once annual home costs exceed ~$15,000, but adds depreciation-recapture complexity for owners. **Vehicle:** - Standard mileage rate (verify the current rate on irs.gov) vs actual expenses × business-use % — pick per vehicle, but standard-mileage must be chosen in year 1 to keep the option. - The log is the deduction: date, destination, purpose, miles, kept contemporaneously. Commuting from home to a regular workplace is never business mileage. ## Canada: salary vs dividends worked math CCPC in a ~9%-federal SBD province, owner needs $80,000 pre-personal-tax cash, corporate pre-tax profit $150,000. Illustrative combined rates — model the actual province. **All salary ($80,000):** corporation deducts it (saves ~12% combined corporate ≈ $9,600 on that slice); owner pays personal tax + CPP (~$4,000 employee+employer, half deductible); owner earns $14,400 RRSP room. **All dividends ($80,000 non-eligible):** corporation first pays ~12% corporate tax, dividends carry a gross-up + credit designed so the combined bill lands within ~1–2% of the salary route (integration). No CPP cost — and no CPP benefit, **zero RRSP room**. **Decision drivers, not totals:** RRSP room (salary only), CPP disability/retirement value vs its cost, provincial integration gaps, income smoothing (dividends flexible), mortgage-qualification preferences. Default blended pattern: salary to the RRSP-max level (≈ $187,800 for full room — or lower per cash reality), dividends for the remainder. ## Canada: passive-income SBD grind table SBD limit reduction = 5 × (passive investment income − $50,000). | Corporate passive income | SBD limit remaining | |---|---| | ≤ $50,000 | $500,000 | | $75,000 | $375,000 | | $100,000 | $250,000 | | $150,000+ | $0 — all active income at the general rate (~15% federal) | Each $1 of passive income above $50k costs $5 of limit ≈ up to ~$0.30 extra corporate tax. Mitigations: pay salary/dividends out and invest personally (RRSP/TFSA), buy back active capacity, corporate-class funds deferring income realization. ## Canada: common CCA classes Verify class assignments and rates on canada.ca — these are the frequent ones: | Class | Rate | Typical assets | |---|---|---| | 8 | 20% | Furniture, equipment, tools ≥ $500 | | 10 / 10.1 | 30% | Vehicles (10.1 caps luxury-car cost — no terminal loss) | | 12 | 100% | Small tools < $500, some software | | 50 | 55% | Computer hardware | | 14.1 | 5% | Goodwill and other intangibles | Mechanics: declining balance on the class pool; the half-year rule limits the first-year claim to half the addition (accelerated first-year rules have varied — verify current status); CCA is optional each year — skipping it in loss years preserves the pool for profitable ones. ## Year-end checklist (both countries) 1. Project profit to Dec 31 while there is still time to act (start in November). 2. US: confirm reasonable salary run through payroll; fund Solo 401(k) deferral by Dec 31; place equipment in service before year-end if deducting this year; Q4 estimated payment Jan 15. 3. Canada: set salary/bonus by Dec 31 (bonus accrued now, payable within 180 days); check passive income vs $50k; decide this year's CCA claim; confirm GST/HST ITCs all captured. 4. Both: document the business purpose of each move in writing, dated now — not at audit time. ## Gotchas - **Unreasonably low S-corp salary** is the IRS's top S-corp audit issue; distributions reclassified as wages arrive with penalties and interest. - **S-corp reduces the retirement base:** employer 401(k)/SEP contributions key off salary, not distributions — aggressive salary minimization can cost more shelter than it saves in FICA. - **Integration is provincial:** salary-vs-dividend "neutrality" varies ±2-3% by province and income type — always compute, never assume. - **Bonus accrual trap (Canada):** an accrued bonus unpaid within 180 days of year-end is denied as a deduction until paid. - **CCA is optional per year** — claiming it in a loss year wastes it; carry the pool forward instead. - **GST/HST on the $30,000 threshold:** registration is mandatory from the quarter you cross it — late registration means remitting tax you never collected. - **Personal expenses through the corporation** (Canada) trigger shareholder-benefit inclusion at full rates with no corporate deduction — the worst of both worlds, plus penalties. - **Paper trails beat intentions:** logs, minutes, and comparables written contemporaneously are what survive an audit.