# 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.

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

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).

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:

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.