A landscaping S corporation pays state income tax, a federal late-deposit penalty, sales tax on a new mower, and fuel excise tax in the same month. Only three of those four reach the return.
A business pays many kinds of taxes: income, property, payroll, sales and excise taxes. IRC §164 and §162 together govern the deductibility of taxes a business pays. The general rule is that a tax paid or accrued in carrying on a trade or business is deductible, with a short list of statutory exceptions.
Most business taxes land clearly on one side or the other:
Sales tax never gets its own line on a business return. The proper treatment of sales taxes paid follows the item purchased: treat the tax the same way you treat the purchase. Sales tax on office supplies is part of supplies expense. Sales tax on a $60,000 machine becomes part of the machine's basis, which means it is capitalized (recovered through depreciation instead of deducted right away).
Common mistakes
- Deducting sales tax separately. Candidates list $4,200 of sales tax on a $60,000 machine as a current expense. Instead, the tax goes into the machine's $64,200 basis. The proper treatment of sales taxes paid always follows the underlying purchase.
- Applying the $100 floor to business property. The $100 per-event floor and the 10%-of-AGI reduction belong to personal casualties only. A business truck destroyed in a flood deducts its full adjusted basis minus insurance, with no floor.
- Using FMV on a totally destroyed business asset. When business property is completely destroyed, the measure is adjusted basis. That holds even if basis is $40,000 and fair market value (FMV) was $25,000. The lesser-of test applies only to partial losses.
Bottom line
- Federal income tax, government fines, and value-increasing special assessments are never deductible; sales tax follows the item it was paid on.
- Employment taxes: 6.2% OASDI to $176,100, 1.45% Medicare uncapped, FUTA 0.6% net on the first $7,000; the §6672 penalty is 100% personal.
- Business casualty loss equals adjusted basis if totally destroyed, lesser of basis or FMV decline if partial, minus insurance, with no $100 floor and no AGI haircut.
- §1033 defers condemnation gain if the full award is reinvested: two years generally, three for condemned business real property.
Exam shortcut
Read the QBI stem backwards. Find taxable income before the deduction first, compare it to $197,300 or $394,600, and if you are under, stop: 20% of the lesser of QBI or taxable income, no wage test, SSTB irrelevant. That single check kills half the distractors. Above the top, ask "SSTB?" before touching wages. Yes means zero, and every wage computation in the answer choices is bait.
The full lesson (about 4,735 words, 32 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 2
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