Schedule C sales tax and deducting it

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Topic Author
schrute
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Schedule C sales tax and deducting it

Post by schrute »

My spouse has a business and last year took a loss. Income was down a bit. But rent basically depleted any profit so have a loss this year. In addition, have sales tax for the sales that were done. It's a mixture of digital and physical products, so not all the income counts for sales tax purposes. Her business in the state is on a fiscal year that ends in June. For personal taxes, it ends in December. For deduction purposes, do we report what we paid the state (which is July 2019 - June 2020) or what is actually treated as sales tax for 2020 (Jan 2020 - December 2020)? I assume the latter. The latter is smaller than the former.
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FiveK
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Re: Schedule C sales tax and deducting it

Post by FiveK »

Does she run her business on a cash or accrual basis?
WAROB
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Re: Schedule C sales tax and deducting it

Post by WAROB »

Somewhat confused on the question here. Sales tax should be charged to the client when applicable and remitted to the state. You don't report the sales tax charged as income and you don't deduct the sales tax remitted. Typically a business would not have any deduction for sales tax.
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schrute
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Re: Schedule C sales tax and deducting it

Post by schrute »

FiveK wrote: Wed May 12, 2021 9:49 pm Does she run her business on a cash or accrual basis?
Cash.
WAROB wrote: Thu May 13, 2021 12:29 pm Somewhat confused on the question here. Sales tax should be charged to the client when applicable and remitted to the state. You don't report the sales tax charged as income and you don't deduct the sales tax remitted. Typically a business would not have any deduction for sales tax.
So sales tax is charged to the client, but not all sales require sales tax (some items are physical which requires sales tax and some are digital which don't require sales tax). Minority of sales requires sales tax. So it is part of the gross sales or gross receipts. I thought to show the actually income, we would deduct it off Tax and Licenses, so my question is around the time frame.
tj
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Re: Schedule C sales tax and deducting it

Post by tj »

schrute wrote: Fri May 14, 2021 9:44 pm
FiveK wrote: Wed May 12, 2021 9:49 pm Does she run her business on a cash or accrual basis?
Cash.
WAROB wrote: Thu May 13, 2021 12:29 pm Somewhat confused on the question here. Sales tax should be charged to the client when applicable and remitted to the state. You don't report the sales tax charged as income and you don't deduct the sales tax remitted. Typically a business would not have any deduction for sales tax.
So sales tax is charged to the client, but not all sales require sales tax (some items are physical which requires sales tax and some are digital which don't require sales tax). Minority of sales requires sales tax. So it is part of the gross sales or gross receipts. I thought to show the actually income, we would deduct it off Tax and Licenses, so my question is around the time frame.
http://www.bidawiz.com/questions/busine ... -for-taxes

https://www.irs.gov/pub/irs-pdf/p334.pdf

Sales tax. State and local sales taxes imposed on the buyer, which you were required to collect and pay over to
state or local governments, are not income.
Topic Author
schrute
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Re: Schedule C sales tax and deducting it

Post by schrute »

tj wrote: Fri May 14, 2021 9:46 pm
schrute wrote: Fri May 14, 2021 9:44 pm
FiveK wrote: Wed May 12, 2021 9:49 pm Does she run her business on a cash or accrual basis?
Cash.
WAROB wrote: Thu May 13, 2021 12:29 pm Somewhat confused on the question here. Sales tax should be charged to the client when applicable and remitted to the state. You don't report the sales tax charged as income and you don't deduct the sales tax remitted. Typically a business would not have any deduction for sales tax.
So sales tax is charged to the client, but not all sales require sales tax (some items are physical which requires sales tax and some are digital which don't require sales tax). Minority of sales requires sales tax. So it is part of the gross sales or gross receipts. I thought to show the actually income, we would deduct it off Tax and Licenses, so my question is around the time frame.
http://www.bidawiz.com/questions/busine ... -for-taxes

https://www.irs.gov/pub/irs-pdf/p334.pdf

Sales tax. State and local sales taxes imposed on the buyer, which you were required to collect and pay over to
state or local governments, are not income.
Is information from this link grossly mistaken? https://www.hurdlr.com/deductions/sales-tax-deduction
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FiveK
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Re: Schedule C sales tax and deducting it

Post by FiveK »

schrute wrote: Fri May 14, 2021 9:44 pm I thought to show the actually income, we would deduct it off Tax and Licenses, so my question is around the time frame.
As it says on p. 30 of Pub. 334,
Sales tax collected. Check to make sure your records show the correct sales tax collected.
If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts.
If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income.
If this is sales tax the buyer pays, then as WAROB and tj suggest you should not include it in income.

In any case, as a cash basis business, only expenses incurred within the business's tax year should be included. The tax years of entities with whom her business interacts are irrelevant to her reporting requirement.
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FiveK
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Re: Schedule C sales tax and deducting it

Post by FiveK »

schrute wrote: Fri May 14, 2021 10:09 pm Is information from this link grossly mistaken? https://www.hurdlr.com/deductions/sales-tax-deduction
If it were me, I would follow instructions from an IRS publication over some random internet site. Doesn't mean the IRS site will be correct 100% of the time, but the odds favor the IRS site.
hachiko
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Re: Schedule C sales tax and deducting it

Post by hachiko »

What state(s) are you charging sales tax in? In almost all states the tax is on the buyer of the goods and/or services, so you do not include it in income or as an expense.

If you accrue use tax that may be an expense, but it is generally included in the cost of whatever you purchased.

There are some scenarios where you'd be paying sales tax and/or use tax where it would actually be considered a separate tax expense, but this is pretty rare for most businesses and almost non-existent for small businesses absent an audit.
Made money. Lost money. Learned to stop counting.
Topic Author
schrute
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Re: Schedule C sales tax and deducting it

Post by schrute »

hachiko wrote: Fri May 14, 2021 10:18 pm What state(s) are you charging sales tax in? In almost all states the tax is on the buyer of the goods and/or services, so you do not include it in income or as an expense.

If you accrue use tax that may be an expense, but it is generally included in the cost of whatever you purchased.

There are some scenarios where you'd be paying sales tax and/or use tax where it would actually be considered a separate tax expense, but this is pretty rare for most businesses and almost non-existent for small businesses absent an audit.
California.
hachiko
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Re: Schedule C sales tax and deducting it

Post by hachiko »

schrute wrote: Fri May 14, 2021 10:09 pm
tj wrote: Fri May 14, 2021 9:46 pm
schrute wrote: Fri May 14, 2021 9:44 pm
FiveK wrote: Wed May 12, 2021 9:49 pm Does she run her business on a cash or accrual basis?
Cash.
WAROB wrote: Thu May 13, 2021 12:29 pm Somewhat confused on the question here. Sales tax should be charged to the client when applicable and remitted to the state. You don't report the sales tax charged as income and you don't deduct the sales tax remitted. Typically a business would not have any deduction for sales tax.
So sales tax is charged to the client, but not all sales require sales tax (some items are physical which requires sales tax and some are digital which don't require sales tax). Minority of sales requires sales tax. So it is part of the gross sales or gross receipts. I thought to show the actually income, we would deduct it off Tax and Licenses, so my question is around the time frame.
http://www.bidawiz.com/questions/busine ... -for-taxes

https://www.irs.gov/pub/irs-pdf/p334.pdf

Sales tax. State and local sales taxes imposed on the buyer, which you were required to collect and pay over to
state or local governments, are not income.
Is information from this link grossly mistaken? https://www.hurdlr.com/deductions/sales-tax-deduction
At the end of the day, it doesn't matter, so no one at the IRS really cares that much. Theoretically, you are simply acting as an agent for the taxing authority. The tax you collect never belongs to you.
Made money. Lost money. Learned to stop counting.
Topic Author
schrute
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Re: Schedule C sales tax and deducting it

Post by schrute »

hachiko wrote: Fri May 14, 2021 10:30 pm
schrute wrote: Fri May 14, 2021 10:09 pm
tj wrote: Fri May 14, 2021 9:46 pm
schrute wrote: Fri May 14, 2021 9:44 pm
FiveK wrote: Wed May 12, 2021 9:49 pm Does she run her business on a cash or accrual basis?
Cash.
WAROB wrote: Thu May 13, 2021 12:29 pm Somewhat confused on the question here. Sales tax should be charged to the client when applicable and remitted to the state. You don't report the sales tax charged as income and you don't deduct the sales tax remitted. Typically a business would not have any deduction for sales tax.
So sales tax is charged to the client, but not all sales require sales tax (some items are physical which requires sales tax and some are digital which don't require sales tax). Minority of sales requires sales tax. So it is part of the gross sales or gross receipts. I thought to show the actually income, we would deduct it off Tax and Licenses, so my question is around the time frame.
http://www.bidawiz.com/questions/busine ... -for-taxes

https://www.irs.gov/pub/irs-pdf/p334.pdf

Sales tax. State and local sales taxes imposed on the buyer, which you were required to collect and pay over to
state or local governments, are not income.
Is information from this link grossly mistaken? https://www.hurdlr.com/deductions/sales-tax-deduction
At the end of the day, it doesn't matter, so no one at the IRS really cares that much. Theoretically, you are simply acting as an agent for the taxing authority. The tax you collect never belongs to you.
True, but want to get it right in case of an audit. Because of covid, the business had a loss in 2020.
clemrick
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Re: Schedule C sales tax and deducting it

Post by clemrick »

schrute wrote: Wed May 12, 2021 5:25 pm My spouse has a business and last year took a loss. Income was down a bit. But rent basically depleted any profit so have a loss this year. In addition, have sales tax for the sales that were done. It's a mixture of digital and physical products, so not all the income counts for sales tax purposes. Her business in the state is on a fiscal year that ends in June. For personal taxes, it ends in December. For deduction purposes, do we report what we paid the state (which is July 2019 - June 2020) or what is actually treated as sales tax for 2020 (Jan 2020 - December 2020)? I assume the latter. The latter is smaller than the former.
The business is cash based and the IRS is looking for what you actually sent to the state in 2020, that is your deduction.

And to the other posters, yes, state tax IS included in gross receipts according the IRS instructions for Line 23:
• State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you also must include the amount collected in gross receipts or sales on line 1.
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FiveK
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Re: Schedule C sales tax and deducting it

Post by FiveK »

clemrick wrote: Sat May 15, 2021 11:38 am And to the other posters, yes, state tax IS included in gross receipts according the IRS instructions for Line 23:
• State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you also must include the amount collected in gross receipts or sales on line 1.
Keep reading in those instructions. ;)
Do not deduct the following.
...
• State and local sales taxes imposed on the buyer that you were required to collect and pay over to state or local governments. These taxes are not included in gross receipts or sales nor are they a deductible expense. However, if the state or local government allowed you to retain any part of the sales tax you collected, you must include that amount as income on line 6.
In other words, it depends....
Topic Author
schrute
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Re: Schedule C sales tax and deducting it

Post by schrute »

FiveK wrote: Sat May 15, 2021 11:52 am
clemrick wrote: Sat May 15, 2021 11:38 am And to the other posters, yes, state tax IS included in gross receipts according the IRS instructions for Line 23:
• State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you also must include the amount collected in gross receipts or sales on line 1.
Keep reading in those instructions. ;)
Do not deduct the following.
...
• State and local sales taxes imposed on the buyer that you were required to collect and pay over to state or local governments. These taxes are not included in gross receipts or sales nor are they a deductible expense. However, if the state or local government allowed you to retain any part of the sales tax you collected, you must include that amount as income on line 6.
In other words, it depends....
It sounds like in my situation it's not necessary.
hachiko
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Re: Schedule C sales tax and deducting it

Post by hachiko »

clemrick wrote: Sat May 15, 2021 11:38 am
schrute wrote: Wed May 12, 2021 5:25 pm My spouse has a business and last year took a loss. Income was down a bit. But rent basically depleted any profit so have a loss this year. In addition, have sales tax for the sales that were done. It's a mixture of digital and physical products, so not all the income counts for sales tax purposes. Her business in the state is on a fiscal year that ends in June. For personal taxes, it ends in December. For deduction purposes, do we report what we paid the state (which is July 2019 - June 2020) or what is actually treated as sales tax for 2020 (Jan 2020 - December 2020)? I assume the latter. The latter is smaller than the former.
The business is cash based and the IRS is looking for what you actually sent to the state in 2020, that is your deduction.

And to the other posters, yes, state tax IS included in gross receipts according the IRS instructions for Line 23:
• State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you also must include the amount collected in gross receipts or sales on line 1.
This is the distinction noted above. Some states impose the tax on the seller, but allow sellers to collect "reimbursement" from the buyer. This is why you see the IRS say to include it in gross receipts, and you can deduct as an expense.

However, most states impose the tax on the buyer, which means the tax received from the buyer does not belong to the seller at any point, and is not included in gross receipts.

But again, it doesn't matter for your net income subject to tax (as long as you're consistent for any given dollar received - include and deduct or exclude and don't deduct). An agent isn't going to waste time calculating amounts and writing up an adjustment. And even if they do, it's an "ok, good for you, you found a mistake, where's my no change?"
Made money. Lost money. Learned to stop counting.
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