For example, the annual fees for a state licenses (occupational licenses, liquor licenses, chauffeur licenses, building permits, and so on) and regulatory fees paid annually to state or local governments in connection with the business are important – but often forgotten – tax deductions for a small business.
These costs can be deducted whether the fees are paid on behalf of an employee (including a sole proprietor or business owner) or whether they are charged to the business by the state.
Here are some examples of the kinds of tax payments that are deductible – talk to your tax advisor for a complete list of taxes that may qualify as a tax deduction or credit that will lower your federal income tax bill:
- Real estate taxes imposed on business property. (Real estate taxes paid on a personal residence with a qualified home office are deducted as business-use-of-home expenses.)
- Any state or local tax on gross income (as distinguished from net income) directly attributable to a trade or business.
- Personal property taxes imposed on property used in a trade or business other than those for vehicles.
- Sales taxes imposed on sales of property or services at retail and measured by gross sales price or gross receipts. If this tax is collected from the buyer, the amount must be included in gross receipts. Note: Sales taxes paid on supplies or depreciable properties are added to the depreciation cost basis of the property.
- Independent contractors and self-employed individuals who live in a state without a state income tax may be able to deduct all sales taxes paid during the year – on personal and business expenses. There is a “standard deduction” in the Form 1040 instruction book, but tracking receipts and expenses all year – especially if there were significant purchases during the year such as a home remodel, new furnishings, buying supplies for a new baby, and so on – may deliver a tax break for qualifying taxpayers.
- Compensating use taxes that are generally imposed on the use, storage, or consumption of an item brought in from another taxing jurisdiction.
- Federal highway use tax.
- Payroll taxes. There are limits on the allowable deductions for employment taxes that a business must pay on behalf of employees, including:
- Social Security tax of 6.2 percent on each employee’s wages up to $90,000.
- Medicare tax of 1.45 percent on each employee’s wages.
- Federal unemployment tax (FUTA) ranging from 0.8 percent up to 6.2 percent on each employee’s wages up to $7,000.
- State unemployment tax, which varies by state.
One important caveat: independent contractors, sole proprietors, freelancers and self-employed individuals are not eligible for the Social Security tax deduction. Only an employer can deduct the portion of the Social Security tax it pays on behalf of an employee.
However, self-employed individuals who overpaid this tax can get a credit for Social Security over withholding. There is a limit on how much can be contributed each year in FICA taxes. The tax is withheld from earnings up to the Social Security earnings base, which is adjusted annually for inflation. For the 2013 tax year, the base is $113,700.
If you become self-employed towards the end of the year, or hold more than one job during the year, and your combined earnings exceeded the wage base, too much FICA may have been withheld, and you can claim the excess Social Security tax as a credit when you file your tax return.
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