Tax Time for Your Business: Are Local Business Taxes Deductible?

What Kinds of Local Business Taxes Are Typically Deductible?

1. State and Local Income Taxes (SALT) - For Businesses:

   • If your business is structured as a C-corporation, it can deduct state and local income taxes paid on its corporate income.

   • For pass-through entities (sole proprietorships, partnerships, S-corporations, LLCs taxed as such), the business income and deductions pass through to the owners' personal returns. While the business itself doesn't pay income tax, the owners may be able to deduct state and local income taxes paid on that business income as part of their personal itemized deductions, subject to the current $10,000 SALT cap per household (which includes property taxes plus state and local income or sales taxes). It's crucial to consult with a tax professional here due to the complexities of the SALT cap and how it applies to business income passed through.

2. Real Estate Taxes (Property Taxes):

   • If your business owns real property (like an office, store, or factory), the local property taxes paid on that business property are generally deductible as a business expense.

   • If you lease your business space and your lease agreement requires you to pay a portion of the property taxes, that amount is also typically deductible as rent expense.

3. Sales Taxes (Paid by the Business as a Buyer):

   • When your business buys goods or services and pays sales tax on those purchases, that sales tax is generally considered part of the cost of the item.

     • If the item is a current business expense (e.g., office supplies), the sales tax is included in the deductible expense.

     • If the item is a capital asset (e.g., machinery, a vehicle), the sales tax is added to the basis (cost) of the asset and depreciated over time, rather than being deducted immediately.

   • Important Note: Sales tax your business collects from customers and remits to the government is not a deductible expense for your business. You are acting as a collection agent for the government.

4. Payroll Taxes (Employer's Share):

   • The employer's share of Social Security and Medicare taxes (FICA) is a deductible business expense.

   • Federal Unemployment Tax (FUTA) paid by the employer is deductible.

   • State Unemployment Tax (SUTA) paid by the employer is deductible.

5. Excise Taxes:

   • If your business pays local (or state/federal) excise taxes directly as part of its operations (e.g., taxes on manufacturing certain goods, trucking, etc.), these are generally deductible.

6. Licenses and Regulatory Fees:

   • Fees paid to local (and state) governments for business licenses or permits necessary to operate your business are typically deductible. This includes things like professional licenses, liquor licenses, or health department permits.

What's Generally NOT Deductible (or has limitations):

• Federal Income Taxes: You cannot deduct federal income taxes paid by your business (if a C-corp) or by you as an owner on business profits.

• Taxes for Local Benefits and Improvements: Taxes assessed for local benefits that tend to increase the value of property (e.g., assessments for streets, sidewalks, water and sewer lines in a specific development) are generally not immediately deductible. Instead, they are usually added to the basis of the property.

• Fines and Penalties: You generally cannot deduct fines or penalties paid to any government entity for violating the law (e.g., parking tickets, penalties for late tax filing).

• The $10,000 SALT Cap (for Individuals/Pass-Through Owners): As mentioned earlier, for individual taxpayers (including owners of pass-through businesses reporting income on personal returns), the deduction for state and local taxes (income/sales and property) is capped at $10,000 per household per year. This can limit the amount of local business-related taxes (like property taxes on a home office or state income taxes on business profits) that an individual owner can deduct personally.

Key Considerations:

• Ordinary and Necessary: To be deductible, a business expense, including a tax, must be common and accepted in your trade or business (ordinary) and helpful and appropriate for your trade or business (necessary).

• Record Keeping: Meticulous record-keeping is essential. Keep all receipts, invoices, and statements related to taxes paid.

• Consult a Tax Professional: Tax laws are complex and subject to change. The deductibility of certain local taxes can depend on your specific business structure, location, and circumstances. Always consult with a qualified accountant or tax advisor. They can help ensure you're claiming all eligible deductions and complying with current tax regulations.

In summary, many local taxes your business incurs are indeed deductible, providing some relief on your overall tax burden. Understanding which ones qualify and the limitations involved is a critical part of sound financial management for your local business.