How Small Businesses Deduct State and Local Taxes on Federal Returns
A practical guide to claiming the state and local tax (SALT) deduction for your small business, covering Schedule A limitations and Schedule C business tax
When preparing your federal tax return, you can often deduct certain state and local taxes you paid throughout the year. For small-business owners and freelancers, understanding how to claim these deductions can lower your overall taxable income. However, the rules differ depending on whether the taxes are personal or directly tied to your business operations.
Understanding the SALT Deduction
The state and local tax (SALT) deduction allows taxpayers to itemize certain taxes paid to state and local governments. For individuals, this typically includes either state and local income taxes or state and local sales taxes, along with property taxes.
Under current tax law, the total SALT deduction is capped at $10,000 per year for both single and married filers. To claim these taxes, you must itemize your deductions using Schedule A rather than taking the standard deduction.
Business Taxes on Schedule C
If you operate as a sole proprietor or a single-member LLC, you will likely report your business income on Schedule C. The IRS allows you to deduct taxes and licenses that are directly attributable to your trade or business.
Deductible business taxes on Schedule C typically include:
- State and local real estate taxes on business property
- Personal property taxes on business assets
- Employer payroll taxes you paid
- Business licenses and regulatory fees
Because these are considered ordinary and necessary business expenses, they reduce your business net income directly and are not subject to the $10,000 SALT limitation that applies to personal itemized deductions.
Keeping Your Books Aligned
Accurate bookkeeping is essential for properly separating personal itemizable taxes from deductible business taxes. If you mix these expenses in your daily accounting, you risk overpaying on your federal return or missing out on legitimate business write-offs.
Maintaining clean financial records ensures that when tax season arrives, your state and local tax payments are categorized correctly from the start. If you are transitioning between accounting platforms or need to untangle a complicated set of books, our team at qbo.support offers resources to help you troubleshoot QuickBooks Online and streamline your tax preparation.