All businesses must pay taxes, just as individuals must. 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.
The following looks at different kinds of taxes that businesses must pay and whether they are deductible or not.
All Deductions Must Be Business-related
To be deductible as a business expense, the tax payment must be business-related. You can't deduct personal taxes, like taxes on your home or personal property or taxes paid on non-business related activities.
Deducting Business Taxes
Federal Income Taxes are NOT Deductible
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.
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 the 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 on your personal tax return (Schedule A).
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. Your employer portion is deductible as a tax on your business tax return.
Is Self-Employment Tax Deductible?
Self-employment taxes are paid by business owners for Social Security/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. Other than income taxes, you may deduct expenses for other taxes your business pays:
- City or state gross receipts tax
- State unemployment insurance contributions and contributions to state disability funds (depending on the state)
- State income tax or state business franchise tax
- State, city, or local sales taxes you paid on business purchases
You can deduct sales taxes you collected from customers that you paid to your state's taxing authority. But if you want to take this tax deduction you must include the amount collected in your gross receipts or sales on your business tax return. In effect, this cancels out the tax deduction.
- Real estate tax or property tax on real estate owned by your business (but see below)
- State income tax
- State unincorporated business tax
- Tangible and intangible property tax
- License tax (for your business license, city license, or other)
- Business vehicle registration tax
- Gasoline taxes, if you calculate mileage using the actual expenses method, but not when you use the standard mileage deduction.
- Telephone and cell phone taxes
- Taxes on business travel expenses, such as hotel taxes, air travel taxes, meal taxes, entertainment, laundry, etc.
- Excise taxes and fuel taxes
- Miscellaneous taxes on items like membership dues, stamps, safe deposit box rental, and others.
- Taxes on membership dues are deductible if the dues themselves are deductible. Only dues for business-related organizations are deductible.
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. For a large item purchase, like a car, the sales tax is determined separately; check with your tax professional to see how to handle this.
Taking Deductions for State and Local Taxes
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. See this article on how to calculate your home business deduction.
Disclaimer: This article is for the purpose of providing general information. It is not intended to be tax or legal advice or to provide detailed information to prepare a business tax return. Before you attempt to deduct any taxes from your business tax return, check with your tax professional.