Page 79 - Small Business Taxes

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1. State and local income taxes or general see Pub. 54. For information on the foreign tax Deduction for one-half of self-employment tax
sales taxes. See the Schedule A (Form credit, see Pub. 514. line of Schedule SE (Form 1040).
1040) instructions. Accrual of foreign income taxes. If you For more information on self-employment
2. State and local real estate taxes. See the use an accrual method and choose to take a tax, see Pub. 334.
Schedule A (Form 1040) instructions. See deduction (rather than a credit) for foreign in- Additional Medicare Tax. You may be re-
also Real Estate Taxes, earlier. come taxes, you can deduct the taxes in the quired to pay Additional Medicare Tax on
3. State and local personal property taxes. year in which the fact of the liability becomes self-employment income. See Form 8959 and
fixed and the amount of the liability can be de- the Instructions for Form 8959 for more informa-
However, an individual can deduct a state termined with reasonable accuracy. Generally, tion on the Additional Medicare Tax.
tax on gross income (as distinguished from net this is the year with or within which the tax year
income) directly attributable to a trade or busi- that applies for foreign tax purposes ends or, in
ness as a business expense. the case of a contested tax, the year in which Other Taxes
Accrual of contested income taxes. If the contest is resolved. Different rules may ap-
ply to determine when a foreign income tax is
you use an accrual method, and you contest a considered to accrue for purposes of the for- The following are other taxes you can deduct if
state or local income tax liability, you must ac- eign tax credit. For more information on the for- you incur them in the ordinary course of your
crue and deduct any contested amount in the eign tax credit, see Pub. 514. trade or business.
tax year in which the liability is finally deter-
mined. Excise taxes. Generally, you can deduct as a
If additional state or local income taxes for a Employment Taxes business expense all excise taxes that are ordi-
prior year are assessed in a later year, you can nary and necessary expenses of carrying on
deduct the taxes in the year in which they were your trade or business. However, see Fuel
originally imposed (the prior year) if the tax lia- If you have employees, you must withhold vari- taxes, later.
bility is not contested. You cannot deduct them ous taxes from your employees' pay. Most em- For more information on excise taxes, see
in the year in which the liability is finally deter- ployers must withhold their employees' share of Pub. 510.
mined. social security, Medicare taxes, and Additional Franchise taxes. You can deduct corporate
Medicare Tax (if applicable), along with state
The filing of an income tax return is not and federal income taxes. You may also need franchise taxes as a business expense.
TIP considered a contest and, in the ab- to pay certain employment taxes from your own
sence of an overt act of protest, you funds. These include your share of social secur- Fuel taxes. Generally, taxes on gasoline, die-
can deduct the tax in the prior year. Also, you ity and Medicare taxes as an employer, along sel fuel, and other motor fuels that you use in
can deduct any additional taxes in the prior year with unemployment taxes. your business are included as part of the cost of
if you do not show some affirmative evidence of the fuel. Do not deduct these taxes as a sepa-
denial of the liability. Your deduction for wages paid is not re- rate item.
However, if you consistently deduct addi- duced by the social security and Medicare You may be entitled to a credit or refund for
tional assessments in the year they are paid or taxes, Additional Medicare Tax, and income federal excise tax you paid on fuels used for
finally determined (including those for which taxes you withhold from your employees. You certain purposes. For more information, see
there was no contest), you must continue to do can deduct the employment taxes you must pay Pub. 510.
so. You cannot take a deduction in the earlier from your own funds as taxes.
year unless you receive permission to change Example. You pay your employee $18,000 Occupational taxes. You can deduct as a
your method of accounting. For more informa- business expense an occupational tax charged
tion on accounting methods, see When Can I a year. However, after you withhold various at a flat rate by a locality for the privilege of
taxes, your employee receives $14,500. You
Deduct an Expense in chapter 1. working or conducting a business in the locality.
If you contest a state or local tax liability, and also pay an additional $1,500 in employment
you transfer money or other property as a provi- taxes. You should deduct the full $18,000 as Personal property tax. You can deduct any
sional payment of the contested tax liability, you wages. You can deduct the $1,500 you pay tax imposed by a state or local government on
from your own funds as taxes.
can accrue and deduct the amount of the con- personal property used in your trade or busi-
tested tax liability for which you made the provi- Additional Medicare Tax. You must withhold ness.
sional payment in the year in which you made a 0.9% Additional Medicare Tax from wages
the payment, even though the liability is not de- you pay to an employee in excess of $200,000 Sales tax. Any sales tax you pay on a service
termined until a later year. in a calendar year. The Additional Medicare Tax for your business, or on the purchase or use of
If any portion of the contested amount which property in your business is treated as part of
was deducted in the year the provisional pay- is only imposed on the employee. There is no the cost of the service or property. If the service
employer share of Additional Medicare Tax.
ment was made is later refunded when the con- or the cost or use of the property is a deductible
test is settled, you must include such portion in For more information on the Additional Med- business expense, you can deduct the tax as
your gross income in the year the refund is re- icare Tax, see Form 8959 and its instructions. part of that service or cost. If the property is
ceived. For more information on employment merchandise bought for resale, the sales tax is
Notwithstanding the exception that allows TIP taxes, see Pub. 15 (Circular E). part of the cost of the merchandise. If the prop-
accrual and deduction of contested state or lo- erty is depreciable, add the sales tax to the ba-
cal income tax liability upon payment, current sis for depreciation. For more information on
accrual and deduction is not allowed for in- Unemployment fund taxes. As an employer, basis, see Pub. 551.
come, war profits, and excess profits taxes im- you may have to make payments to a state un- Do not deduct state and local sales
posed by a foreign country or possession of the employment compensation fund or to a state taxes imposed on the buyer that you
!
United States. disability benefit fund. Deduct these payments CAUTION must collect and pay over to the state
as taxes. or local government. Also, do not include these
Foreign income taxes. Generally, you can taxes in gross receipts or sales.
take either a deduction or a credit for income Self-employment tax. You can deduct part of
taxes imposed on you by a foreign country or a your self-employment tax as a business ex-
U.S. possession, subject to limitations. How- pense in figuring your adjusted gross income.
ever, an individual cannot take a deduction or This deduction only affects your income tax. It
credit for foreign income taxes paid on income does not affect your net earnings from self-em-
that is exempt from U.S. tax under the foreign ployment or your self-employment tax.
earned income exclusion or the foreign housing To deduct the tax, enter on Schedule 1
exclusion. For information on these exclusions, (Form 1040), line 15, the amount shown on the

Page 20 Chapter 5 Taxes