Just like individuals, all businesses must pay taxes. The bad news for businesses is that they have more taxes to pay. The good news is that many of these taxes are deductible as business expenses.
Learn more about different kinds of taxes that businesses must pay and whether they are deductible or not.
- In general, businesses can deduct various federal, state, local, and foreign taxes related to your business.
- You cannot deduct federal income taxes.
- The IRS allows you to deduct certain payroll taxes.
- You can deduct sales tax on items you purchased as a deductible business expense.
- If you have any doubts about the validity of a tax-based deduction, speak with a tax professional.
Deducting Business Taxes
In general, the IRS says, "you can deduct various federal, state, local and foreign taxes directly attributable to your trade or business as a business expense."
Your state income taxes may be deductible, depending on your business type and your state. Corporations, S corporations, and partnerships deduct state income taxes on their business return. If you are filing a Schedule C for your business, you can't deduct state income taxes on this form, but you can deduct sales taxes as an itemized deduction on your personal tax return (Schedule A).
The IRS is very clear on this: You cannot deduct federal income taxes These are the taxes you pay on your business income, and you can't deduct the taxes you paid the IRS.
To be deductible as a business expense, the tax payment must be business-related. For example, you can't deduct personal property taxes for personal property you didn't use for your trade or business.
Tax Deductions on Your Business Tax Return
If your business is a corporation or partnership, you can deduct allowable taxes through your business tax return. The "tax" deduction section is different for each business type.
For example, if you are a small business or self-employed, and you file your business tax return on Schedule C along with your personal tax return, you can deduct allowable business taxes on Line 23.
How to Deduct Payroll Taxes
If you have employees, your business portion of payroll taxes is deductible to you. This does not include amounts withheld from employee pay for federal income taxes or for FICA taxes (Social Security and Medicare tax).
For example, if you have a total of $5,000 that you have withheld from employees for FICA tax, you must pay an additional $5,000 as your employer portion from your own funds. Your employer portion is deductible as a tax on your business tax return.
Self-employment taxes are paid by business owners for Social Security and Medicare benefits. The amount is based on the profit of the company, but the business does not pay these taxes; they are paid on the individual's personal tax return.
Like FICA taxes paid by employees, self-employment taxes are not deductible. But, as part of the calculation for your self-employment tax, you can deduct half of the amount of the tax as part of the calculation for your personal adjusted gross income.
Other Deductible Business Taxes
Taxes your business pays are a cost of doing business, and the IRS will allow you to deduct those taxes provided they align with the IRS's rules:
- City or state gross receipts tax
- State unemployment insurance contributions and contributions to state disability funds (depending on the state)
- State income tax or franchise tax
- State, city, or local sales taxes you paid on business purchases
- Real estate tax or property tax on your business property (but see below)
- Gasoline taxes, as part the cost of fuel
- Excise taxes
Deducting Property Taxes
You may deduct the cost of property taxes if the tax is based on the assessed value of the real estate (calculated for property tax purposes). You may not deduct property taxes paid for what the IRS calls "local benefits;" that is, for "local benefits and improvements that tend to increase the value of your property," including "assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities."
How To Deduct Sales Taxes on Business Purchases
Sales taxes you pay for items you purchase for business are deductible if the purchase itself was a deductible business expense. You don't need to be separated out; these taxes are considered as part of the cost of the item. Just include the total amount you paid, including the tax.
Sales taxes are just one example of state taxes that are deductible. State and local income taxes may be deductible on your personal income tax return (using Schedule A). If your business is a corporation or partnership, the business can deduct state and local taxes as a business expense, as long as they are directly related to the business activity.
Business Taxes for Home-Based Businesses
You can't deduct your tax expenses for the personal part of your home, for property tax, for example. But, you may be able to deduct property taxes for that part of your home used regularly and exclusively for business purposes. For more information on deductions for business tax expenses, see IRS Publication 535: Business Expenses or check the instructions for your business tax return.
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