TAXES & LICENSES

State Sales Tax

Did you know you can deduct most of the state sales taxes you pay on your everyday transactions? State sales tax is a common deduction that many taxpayers easily miss. Sales taxes you incur operating your business are deductible on your Schedule C, while sales taxes you personally incur may be deductible on Schedule A if you itemize your deductions and choose not to deduct state income taxes paid.

ARTIST

Ahmed is a solo entrepreneur who has a wholesale and online retail business selling personalized greeting cards. He lives in Texas, a state that has sales tax but no state income tax. When he prepares his Schedule C, he can deduct the sales taxes his paid to the state for goods he sold via his online retail outlet (he should also record sales taxes collected from his online customers in his gross income). When he prepares his itemized deductions, since Texas has no state income tax, he would want to deduct state sales tax paid on his actual personal purchases or use the IRS tables to determine what his sales tax deduction should be.

AUTHOR

Tori writes children's books that she sells wholesale to bookstores across the country. Generally, Tori does not have to collect or pay sales taxes on her wholesale book sales. When she prepares her Schedule C she would not deduct any sales tax expenses (sales taxes paid on business property should be included as part of the properties cost).

AIRBNB HOST

Damon is an airbnb host who frequently rents out the second bedroom in his home. Damon can attribute 45% of his total home costs to his rental activities. Recently, Damon purchased a number of household items to make his home more desirable to his guests and his new girlfriend. Damon saved his receipts and knows he paid $1,000 in sales tax for his household items. Damon deducted $450 of the state sales taxes paid on his Schedule E and the the remaining $550 on his Schedule A after he determined it would be more beneficial than deducting state income taxes.

UBER DRIVER / RIDESHARE

Solomon is a former sidecar driver who who recently purchased a new vehicle. Solomon paid $3,000 in sales taxes on his new vehicle. Since he does not use his car for business, he chose to deduct the sales taxes he paid on his Schedule A. However, before recording the $3,000 of actual sales taxes paid for his car, Solomon checked his state's general sales tax rate and found that if he applied the general state sales tax rate to his purchase, his deduction would be $3,300. Since the general rate was higher than the rate he actually paid, he was able to deduct the full $3,300 on his Schedule A.

UBER DRIVER / RIDESHARE

Sally drives full time for Uber and purchased a new vehicle to be used exclusively in her rideshare business. She paid $4,000 in sales taxes when she purchased her vehicle. Sally would not deduct any of the sales tax on her Schedule C or her Schedule A, rather she would add the $4,000 of sales tax to the basis of her vehicle and deduct the expense through depreciation over the vehicles useful life.

STATE SALES TAX INFORMATION

  • The only state sales taxes you should deduct on line 23 of your Schedule C are sales taxes paid by you directly to your state and local taxing authorities for the sale of your products. Note that the sales taxes you charge your customers should be included as part of your gross income. Further, keep in mind that generally sales tax should not be charged on wholesale orders.
  • State sales taxes paid on purchases of business property should be deducted or capitalized (if you acquired a capital asset) as part of the total cost of the property you purchased.
  • You can only deduct your personal sales taxes if you choose to itemize your deductions. You cannot deduct personal sales taxes paid if you take the standard deduction. Additionally, you must choose between deducting either state income taxespaid OR state sales taxes paid. You cannot deduct both on your Schedule A.
  • If you choose to deduct state sales taxes paid for personal items on your Schedule A you generally will deduct actual sales taxes paid. However, you also have the option to calculate your deduction using the IRS tables (see Schedule A instructions), which provide a deduction amount based on your adjusted gross income, the state you live in and the number of personal exemptions you claim.
  • To deduct actual state sales taxes paid for personal items on your Schedule A you need to keep track of your receipts so you can substantiate your deduction amount.

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