As a business owner in the United States, you likely need to charge, collect, and remit sales tax in the states where you have nexus. While sales tax is a cost of doing business, you may be able to deduct some or all sales tax you pay from your federal income taxes.
Understanding sales tax as a deduction, when and how much sales tax you can deduct can help lower your overall tax bill. This guide will explore everything you need to know about deducting sales tax as a business expense.
Sales Tax as a Deduction
In general, if your business pays sales tax when purchasing goods or services, you can deduct that sales tax as a business expense. However, the deductibility depends on your business structure.
Sole Proprietors and Single Member LLCs
If you operate your business as a sole proprietor or single member LLC, sales tax is deductible as an ordinary and necessary business expense on Schedule C. This deduction directly reduces your business income subject to self-employment taxes and income taxes.
Partnerships and Multi-Member LLCs
Partnerships and multi-member LLCs treated as partnerships can deduct sales tax paid on business purchases as a business expense on Form 1065. This deduction passes through to the partners to reduce their distributive share of partnership income.
S Corporations
S corporations can deduct sales tax on business purchases on Form 1120S. Like partnerships, this deduction passes through to shareholders and reduces their pro rata share of S corporation income.
C Corporations
C corporations deduct sales tax along with other ordinary and necessary business expenses on Form 1120. This deduction reduces the company’s overall taxable income.
As you can see, all pass-through entity structures and C corporations can write off sales tax paid for business purposes as a deduction.
When is Sales Tax Deductible?
You can only deduct sales tax paid in the ordinary course of business. Personal sales tax incurred for non-business purchases cannot be deducted.
Deductible sales tax typically includes
- Sales tax paid when buying raw materials, inventory, and other goods for resale
- Sales tax paid on supplies, equipment, furniture, vehicles, and other assets used in business operations
- Sales tax paid for services like legal, accounting, advertising, utilities, repairs, etc.
You cannot deduct sales tax paid on meals, entertainment, vehicle expenses subject to the 50% deduction limit, and other mixed business/personal expenses.
How Much Sales Tax Can I Deduct?
You can deduct the full amount of eligible sales tax paid during the tax year. This includes:
- Sales tax charged by the seller and paid directly by your business
- Use tax self-assessed and paid on out-of-state purchases
There is no dollar limit on the sales tax deduction. Deduct all qualifying sales tax on business purchases for the tax year.
Keep detailed records showing the amount of sales tax paid and the business purpose of purchases. You must be able to substantiate deductions claimed if audited.
Claiming the Sales Tax Deduction
Claim the sales tax deduction when filing your business tax return:
- Sole proprietors – Report on Line 5 of Schedule C
- Partnerships/LLCs – Report on Line 9 of Form 1065
- S corporations – Report on Line 5 of Form 1120S
- C corporations – Report on Line 17 of Form 1120
List sales tax with other taxes and licenses claimed as a deduction for the year. You do not need to itemize each sales tax transaction – report the total amount.
Sales Tax vs. Income Tax Deduction
Don’t confuse the sales tax deduction for business purchases with the income tax deduction some taxpayers can claim.
Individual taxpayers who itemize deductions on Schedule A can claim a deduction for state and local income taxes paid during the year. This includes:
- State income tax
- Local income tax
Taxpayers can also choose between deducting state and local income taxes or state and local sales taxes paid for the year – but not both.
The income tax deduction applies to personal taxes, while the sales tax deduction discussed here applies to business taxes.
Sales Tax Refunds
If you deduct sales tax as a business expense and then receive a refund of that sales tax in a later year, you must report the refund as income in the year received.
For example, if you deduct $5,000 of sales tax on inventory purchases in 2022 and then receive a $1,000 sales tax refund in 2023, you must claim the $1,000 refund as taxable income in 2023.
Any sales tax refunds will reduce your total sales tax deduction allowed for the prior year when the refund relates back to sales tax originally deducted.
Sales Tax Records to Keep
Keep thorough records of sales tax paid to support your deduction. Your sales tax records should include:
- Sales receipts showing total purchase price and sales tax charged
- Credit card and bank statements showing sales tax payment
- Sales tax returns filed with details of taxable sales
- Sales tax liability reconciliations
Retain physical and digital copies of records based on the IRS timeline, generally 3 years from when you filed the return claiming the deduction. Proper documentation helps prove the deduction is valid if ever challenged.
Sales Tax Deduction Strategies
Some strategies can help maximize your sales tax deduction:
Time Purchases Strategically
Consider timing major purchases for years when your business has higher income. Deducting more sales tax in high profit years results in greater tax savings.
Understand Nexus Rules
Knowing sales tax nexus laws can help reduce tax paid. If your business has no sales tax nexus with a state, you may not need to pay sales tax on purchases there.
Review Exemption Rules
See if your business qualifies for any sales tax exemptions on business purchases in your state. This can reduce sales tax paid.
Check Tax Rates
Review sales tax rates in nearby states and cities. Cross-border or cross-county buying may result in sales tax savings for big-ticket purchases.
Taking advantage of these kinds of opportunities requires an understanding of the sales tax deduction.
Frequently Asked Questions
Here are answers to some common sales tax deduction questions:
1. Can I deduct sales tax paid on meals and entertainment?
No, you cannot deduct sales tax paid on meals, entertainment, and other mixed business/personal expenses subject to the 50% deduction limit. Sales tax on these expenses is not fully deductible.
2. If I deduct sales tax can I also take the Section 179 deduction?
Yes, you can deduct sales tax paid to acquire an asset and also take a Section 179 deduction on that same asset. Section 179 deduction rules are separate from the sales tax deduction.
3. Is shipping tax deductible?
Yes, any shipping charges for inventory, supplies, and other business purchases that include sales tax can be deducted along with the cost of goods purchased.
4. Can I deduct sales tax paid to another business?
If your supplier embedded the sales tax they paid into the amount charged to your business, you can still deduct the full amount (including the embedded sales tax) as your own sales tax expense.
5. Is sales tax on services deductible?
Yes, if your business pays sales tax on services like legal fees, advertising, accounting, etc. you can deduct this sales tax just like sales tax paid for goods.
Deducting Sales Tax Saves Money
As a business owner, deducting sales tax paid for business purchases provides valuable tax savings. Understanding the deduction rules allows you to properly time purchases, know what is deductible, and keep the right records.
Claiming all eligible sales tax as a business expense each year ensures you maximize this deduction to reduce your bottom line tax bill. Use our sales tax calculator to easily estimate sales tax in your area.
