S-Corp Tax Savings Examples - How $48M in Business Profits Gets Taxed

S-Corps are "pass-through" entities, which means all income passes through to your personal tax return regardless of whether you take it out of the business or not. Let me break down your examples: Example 1: Even though you're keeping the $64.3 million in the business, you'll still pay personal income tax on ALL $67 million of income (minus business expenses) on your personal return. The $64.3 million doesn't escape taxation just because it stays in the business. You'll receive a K-1 showing your share of the business income, and you'll pay taxes on that total amount. Example 2: Same deal tax-wise. You pay personal income tax on the full $67 million (minus expenses) whether you take distributions or not. The $2.7 million salary is subject to both income tax AND self-employment taxes (Social Security/Medicare), while the $64.3 million distribution is only subject to income tax, not self-employment taxes. That's where the S-Corp tax advantage comes in - by taking a reasonable salary and the rest as distributions, you save on self-employment taxes on the distribution portion.

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One thing that's important to add about S-Corp taxation - there's a concept called "basis" that affects how distributions are taxed. Your basis is basically your investment in the company plus accumulated profits minus previous distributions. If your distributions exceed your basis, the excess gets taxed as capital gains. This happens more often than people realize, especially in examples like yours with large distributions. So in Example 2, if your basis in the company isn't at least $64.3 million, some of that distribution could be taxed as capital gains rather than ordinary income.

Just to add something that was glossed over - in the original example with $67M revenue, we're assuming that's net profit after expenses, right? Because revenue itself isn't what passes through to your personal return - it's net business profit after all legitimate business expenses. So if your S-Corp had $67M in revenue but $40M in legitimate business expenses, your actual pass-through income would be $27M, not $67M.

Great point about revenue vs. net profit! This is a crucial distinction that trips up a lot of S-Corp owners. In your $67M example, if we're talking about actual revenue, you'd first subtract all legitimate business expenses - salaries, rent, equipment, marketing, professional fees, etc. Let's say your actual net profit after expenses is $27M (as Kolton suggested). Then your $2.7M salary would be part of those business expenses, reducing your pass-through income to around $24.3M. You'd pay personal income tax on that $24.3M whether you distribute it or keep it in the business. The self-employment tax savings would be on the $24.3M in distributions rather than $64.3M, but that's still substantial - roughly $3.7M in self-employment tax savings vs. if you structured as a sole proprietorship. Also worth noting that with profits this large, you'd definitely want to work with a tax professional to ensure your salary meets the "reasonable compensation" requirements. The IRS scrutinizes S-Corps with high distributions relative to salaries, especially when we're talking about millions in pass-through income.