If you're self-employed or own a small business, you get a perk from the federal tax code that many individual taxpayers do not: You get to write off part of the taxes you pay each year as a deductible expense.
Granted, that provision doesn’t extend to your state or local income taxes. But you can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses. For those using the cash method of accounting, you can only deduct taxes in the tax year that you pay them.
If you're using the accrual method, you can actually deduct some taxes before you pay them, but the exception for recurring items has to be met before that can happen. For details, see IRS Publication 538, Accounting Periods and Methods.
Except where other otherwise noted, you should enter most of these taxes on line 23 of the Schedule C screen on your 1040.com return:
- On Schedule C, you can deduct a state tax on gross income (rather than on net income) directly attributable to your business.
- You can deduct state and local income taxes on Schedule A using the Taxes you Paid screen in 1040.com if you itemize deductions. You cannot deduct federal income tax.
- You can deduct Social Security, Medicare and federal unemployment taxes (FUTA) you paid out of your own funds as an employer. You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. Deduct those payments as taxes.
- You can deduct one-half of your self-employment tax on line 27 of Form 1040. We do that for you automatically on your 1040.com return; it appears on line 27 on the PDF version of your return.
- Any personal property tax imposed by a state or local government on property used in your business can be deducted. You can also deduct occupation taxes or fees for the right to use property within a state or local area.
- You can deduct real estate taxes you pay on your business property.
- You can deduct all excise taxes that are ordinary and necessary to your business. Fuel taxes, however, whether from gasoline, diesel or other motor fuels, are usually included in the cost of the fuel, which you're probably already deducting as a business expense. Do not deduct these taxes as a separate item.
- Corporate franchise taxes can be deducted as a regular business expense item.
What About Refunds?
If you get a refund of taxes already deducted in an earlier year, you’ll need to declare that refund as income. Any interest you get with tax refunds also has to be declared as income.