We know that as a business owner you’re responsible for paying the taxes on your business’s income. So, of course, it seems like those taxes would be an expense to your business, right?
Rule #1 in accounting: Whatever seems logical, do the opposite.
We’re not talking about logic here. We’re talking about taxes…and there’s no logic in taxes!
But don’t worry! In this article we’ll help you make sense of which taxes are considered business expenses so you can kick tax season’s ass.
Let’s get into it.
What Taxes Are Considered Business Expenses?
In some cases, your business taxes can be deductible as business expenses.
Your business is likely a pass-through entity (sole proprietorship, single/multi member LLC, S-Corp, Partnership, you get it). Unless it’s a C-Corp – C-Corps are not pass-through entities.
In a pass-through entity, all the income passes through to the owners, which makes the owners responsible for paying the taxes. So, the bulk of the taxes you pay as a business owner are for your personal taxes and personal taxes are not an expense.
As a consolation, some states do offer a pass-through entity tax. This means you can elect to pay an additional tax through your business because it’s a write-off and then you’ll receive a credit on your personal state return for these taxes paid. So, while the tax is additional, it’s not a double tax. Check with your tax professional to see if your state offers this!
How do you know if the tax you are paying is personal? Generally, if you’re paying to the IRS or your state under your social, it’s a personal tax. If your business does not have an EIN, it’s possible you could be making a business tax payment under your social, this would occur at the state or city level, and it would be clearly identified as a business tax.
Which Business Taxes Are Allowed As Deductions?
1.) Income Taxes
If you’re paying taxes under your Social Security Number or your ITIN (Individual Taxpayer Identification Number), it’s probably not a business expense. But if it’s under your EIN (Employer Identification Number), it’s likely a deductible tax.
Here are a couple types of income taxes that can be deducted as business expenses:
If you run an S-Corp or a C-Corp, you may have to pay business taxes and these are deductible. They may be called: corporate taxes, entity taxes, profits tax, pass-through entity tax, or business taxes.
Limited Liability Company (LLC) or Sole Proprietor Taxes
Some states require sole proprietors and LLCs to pay business taxes. Usually if there’s a tax shown on your business’s tax return—or if you file and pay a tax under your business’s name (not your name)—it’s a business tax that you can and should deduct from your taxes.
These taxes may be called: business tax, unincorporated business tax, entity tax, profits tax, pass-through entity tax, givemeallofyourmoney tax. Ya know, the usual.
If you don’t have a separate name for your business, you could still possibly have business taxes to pay and they would be identified as a business tax.
If you have an LLC or a corporation, you’ll likely need to pay annual or biannual fees to the state(s) you are registered to do business in. These fees are separate from your taxes, but still deductible. The states may call them: annual fees, biannual fees, annual report fees, annual filing fees, you get the point.
2.) Sales Tax
Sales tax is considered a business expense only if it’s included in your income. If it’s not included in your income, it’s not taxable. Most businesses don’t report sales tax as an expense because they don’t include the sales tax on their income figure.
Let’s say you sold something for $10 and you charged a $1 tax, so now it costs your customer $11. The $11 is not your revenue, $10 is your revenue. You earned $10 and collected $1 in sales tax.
If you’re not sure which category you fall in, reach out to your bookkeeper or tax professional.
3.) Payroll Taxes
If you have an S-Corp and are on payroll, or if you have employees, you are probably familiar with payroll taxes. Payroll taxes include things like the employer’s share of medicare and social security, federal unemployment, state unemployment, and possibly additional state taxes on top of the unemployment.
All of the payroll taxes your company pays are deductible.
Please reach out, we’d love to help!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Countless assumes no liability for actions taken in reliance upon the information contained herein.