Published by AE Tax Advisors Team • 2025-12-20

Construction Company S-Corp Election Saves Owner $42,000 Per Year

The Client

Carlos Mendez operated a residential construction company in San Antonio, Texas as a sole proprietorship. The business generated $480,000 in annual revenue with $260,000 in net profit after materials, subcontractors, and overhead. Carlos had three employees.

The Problem

Carlos was paying self-employment tax on his entire $260,000 of net income -- approximately $28,800 per year in SE tax alone. His total federal tax burden was $72,000 annually. He was also missing deductions for vehicle use, home office, and tool depreciation because his recordkeeping system was not structured to capture them.

Our Strategy

We formed an LLC, elected S-Corp treatment, and set Carlos's salary at $105,000 -- benchmarked against construction company owner-operator compensation in the San Antonio market. The remaining $155,000 would flow as distributions. We also implemented an accountable plan for his truck ($14,400/year deduction), home office ($6,200/year), and tool depreciation ($8,800 Section 179). A SEP-IRA was established for retirement contributions.

The Results

The S-Corp election eliminated $23,700 in self-employment tax on distributions. Combined with the accountable plan deductions, Section 179 depreciation, and retirement contributions, total annual savings reached $42,000. Carlos's effective tax rate dropped from 27.7% to 11.5%.

Key Takeaway

Construction company owners operating as sole proprietors are among the most overtaxed small business owners. The combination of S-Corp election, accountable plans, and Section 179 depreciation can cut their tax bill nearly in half.