This report explains the ins and outs of program C, Line 23. It is labeled "Taxes and licenses", but this report will focus on just taxes. Sole Proprietors are entitled to deduct certain types of taxes they incur in their business, so it's important that you know what types of taxes are deductible and what types are not deductible.
Non-deductible Taxes.
First, the bad news. There are any types of taxes that you do not get to deduct on program C. The most certain is federal income tax. So sorry to disappoint you, but that's just the way it is. In fact, you don't get to deduct federal income tax everywhere on your federal personal income tax return.
Irs Tax Form 1040
How about state income tax? Well, that is not deductible on program C, but it is deductible on program A, Itemized Deductions, Line 5. So be sure to report it there.
Next comes what is probably the most hated tax of every Sole Proprietor, the dreaded Self-Employment (Se) Tax, which is calculated on program Se and reported on Form 1040, Line 57. Well, I've got good news and bad news on this. The bad news is that is it not fully deductible. The good news is that it is partially deductible. One-half of your Se tax is deductible on Form 1040, Line 27. In effect, this 50% deduction reduced your actual Se tax rate a few percentage points below the starting point of 15.3%.
Deductible Taxes.
Ok, how about some good news? There are any taxes that are fully deductible on program C, Line 23. Here they are.
State and/or local asset taxes on business assets. This would consist of any real estate taxes you pay on land or other buildings used in your business. Also included in this would be personal asset taxes on business assets, together with any personal asset tax on your vehicle (to the extent the vehicle was used for business).
State and/or local sales tax. If you report the sales tax collected from customers in your sales total on Line 1, be sure to also report it here as an expense. If you don't report the sales tax as part of sales, then you don't get to report it as an expense.
Payroll taxes. If you have employees and report wages on program C, Line 26, there are four main payroll taxes you also get to deduct: the employer's share of public security tax, the employer's share of Medicare tax, federal unemployment tax, and state unemployment tax.
How to Deduct Taxes on agenda C, Line 23
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