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Deducting Taxes, Licenses and Fees On Schedule C Business Filing

Warning: These pages are not intended as professional advice. They are presented "as is", reader beware!

I'm combining a few Schedule C lines here, professional services plus taxes and fees. Both are pretty straightforward, but have a gotcha or two. For starters, it generally not necessary to issue a 1099 to corporate entities. But the government makes an exception for law firms, and though I don't think many sole proprietors bother, you are supposed to issue your lawyer a 1099 if you pay for over $600 in legal costs in the course of a year. Other than that. legal costs and advice, along with accounting costs and tax advice, are deductible as long as they are "ordinary and necessary" for the regular operation of your business. I'm not sure why the IRS uses the "ordinary and necessary", perhaps to keep you from running up legal and accounting bills looking for exotic tax shelters.

Deducting other taxes from your business expenses is about the only fun you'll ever get out of paying taxes. These include:

  • Social security and medicare taxes you paid as the employer matching contribution for employees
  • Real estate taxes on business assets, plus any personal property taxes on business property
  • Sales taxes imposed on you as the seller, but keep in mind you have to report the state and local sales taxes you collected as part of your gross before deducting them
  • Most licenses and business fees imposed by local authorities, but liquor licenses need to be amortized
  • Unemployment tax (Federal and state) plus disability tax, assuming your state treas these as taxes

A couple oddball taxes you can't deduct include:

  • Taxes to pay for improvements to the infrastructure (roads, sewers) serving your business
  • Taxes on your home or personal property not used for the business
  • Sales taxes for property purchased for the business - include these in the purchase price you depreciate
  • Sales taxes imposed on the buyer that you collected and aren't included in your gross

I've encountered a lot of confusion over sales tax, including the question, "Do I have to pay the sales tax if my business is losing money?" Assuming the meaning here is, do you have to give the state or local government the sales tax you collected from customers even though your business lost money, the answer is a resounding "Yes." The sales tax you collect is in trust for the tax authority, it's not your money at all, but a transfer of money from the customer to the state. Whether you make or lose money in your business has nothing to do with it.

Planning A New Business | Estimating Business Taxes | Schedule C Deductions | Car Expenses | Freelancer and Contractor Payments | Section 179 Depreciation and Form 4562 | Employee Benefits and Pension Costs | Professional Services, Business Taxes and Fees | Hotel and Travel Expenses | Deducting Food and Entertainment | Inventory and Cost of Goods Sold | Sole Proprietor Statistics | Home Office Deductions | Self Employment Tax | The Self Employed Sole Proprietor