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Ri 1040nr Publication 557 - Introductory Material Table of Contents What's New Reminders Introduction What's New Proposed regulations on “good faith determinations”. Ri 1040nr Proposed regulations modify standards for making a good faith determination that a foreign organization is a charitable organization, grants to which may be qualifying distributions and not taxable expenditures. Ri 1040nr The proposed regulations identify a broader class of tax practitioners upon whose written advice a private foundation may base a “good faith determination. Ri 1040nr ” See, Proposed Regulations: Reliance Standards for Making Good Faith Determinations, REG-134974-12, 2012-47 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 553. Ri 1040nr Prop. Ri 1040nr Regs. Ri 1040nr on Good Faith Determinations. Ri 1040nr New Requirements for section 501(c)(3) Hospitals Under the Affordable Care Act. Ri 1040nr The Affordable Care Act (ACA), enacted March 23, 2010, added new requirements that hospital organizations must satisfy in order to be described in section 501(c)(3), as well as new reporting requirements and excise taxes. Ri 1040nr On June 22, 2012, the Service issued a notice of proposed rulemaking that addresses the new requirements enacted by the ACA applicable to section 501(c)(3) hospital organizations. Ri 1040nr See, Proposed Regulations: Additional Requirements for Charitable Hospitals, REG-13026-11, 77 Fed. Ri 1040nr Reg. Ri 1040nr 38148. Ri 1040nr On April 3, 2013, the Service issued proposed regulations on the ACA's community health needs assessment (CHNA) requirements. Ri 1040nr The proposed regulations also discuss the related reporting and excise tax requirements for charitable hospitals and the consequences for failure to satisfy the section 501(r) requirements. Ri 1040nr See, Proposed Regulations: Community Health Needs Assessments for Charitable Hospitals, REG-106499-12, 78 Fed. Ri 1040nr Reg. Ri 1040nr 20,523. Ri 1040nr Timing of when an Organization is exempt for Federal Tax Purposes. Ri 1040nr As noted in section 2. Ri 1040nr 03(4) of Revenue Procedure 2013-9, 2013-2 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 267, the provisions in section 11. Ri 1040nr 01 regarding the effect of determination letters or rulings recognizing exempt status of organizations described in section 501(c), other than sections 501(c)(3), (9), (17), and (29), have been revised. Ri 1040nr Prior to this year, and back to 1962, when such organizations applied for recognition, the IRS would usually recognize the organizations as tax exempt from the date of formation, no matter how long the interval between the date of formation and the date of application. Ri 1040nr In addition to the practical difficulties of ascertaining an organization's purposes and activities for this period, such recognition is now potentially inconsistent with the provisions of section 6033(j), which automatically revokes the exempt status of an organization that fails to file required Form 990 series returns or notices for three consecutive years. Ri 1040nr The new procedure adopts a practice similar to the rule for section 501(c)(3) organizations for these organizations, generally permitting recognition from the date of formation if the organization has: always met the requirements for exemption, has applied within 27 months from the end of the month in which it was organized, and has not failed to file required Form 990 series returns or notices for three consecutive years. Ri 1040nr Section 11. Ri 1040nr 01(3) notes: an organization that otherwise meets the requirements for tax-exempt status and the issuance of a determination letter or ruling that does not meet the requirements for recognition from date of formation will generally be recognized from the postmark date of its application. Ri 1040nr Exempt Organizations Select Check. Ri 1040nr The IRS has developed an on-line search tool, Exempt Organizations Select Check, that allows users to select an exempt organization and check certain information about its federal tax status and filings. Ri 1040nr It consolidates three former search sites into one, providing expanded search capability and a more efficient way to search for organizations that: Are eligible to receive tax-deductible charitable contributions (Publication 78 data). Ri 1040nr Users may rely on this list in determining deductibility of contributions, just as they did when Publication 78 was a separate electronic publication rather than part of Select Check. Ri 1040nr Have had their tax-exempt status automatically revoked under the law because they have not filed Form 990 series returns or notices annually as required for three consecutive years (Auto-Revocation List). Ri 1040nr Have filed a Form 990-N (e-Postcard) annual electronic notice. Ri 1040nr In addition to searching for a particular organization, users may download a complete list of each of the three types of organizations through Exempt Organizations Select Check. Ri 1040nr See also Revenue Procedure 2011-33, 2011-25 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 887. Ri 1040nr Future developments. Ri 1040nr . Ri 1040nr The IRS has created a page on IRS. Ri 1040nr gov for information about Publication 557, at www. Ri 1040nr irs. Ri 1040nr gov/pub557. Ri 1040nr Information about any future developments affecting Publication 557 (such as legislation enacted after we release it) will be posted on that page. Ri 1040nr Reminders The Patient Protection and Affordable Care Act (ACA). Ri 1040nr The ACA added several new laws. Ri 1040nr This includes a new excise tax on indoor tanning services, a small business health care tax credit, additional requirements for tax-exempt hospitals, and the section 501(c)(29) CO-OP program. Ri 1040nr For more information, go to IRS. Ri 1040nr gov and select Affordable Care Act Tax Provisions. Ri 1040nr Electronic filing requirement for large organizations. Ri 1040nr For tax years ending on or after December 31, 2006, only organizations that file 250 returns during the calendar year and that have total assets of $10 million or more are required to file Form 990 electronically. Ri 1040nr For more information, go to e-file for Charities and Non-Profits. Ri 1040nr Section 501(c)(15) gross receipts. Ri 1040nr The definition of gross receipts for purposes of determining whether small insurance companies qualify as tax-exempt under section 501(c)(15) has changed. Ri 1040nr See Notice 2006-42, 2006-19 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 878, Notice 2006-42. Ri 1040nr Prohibited tax shelter transactions. Ri 1040nr New excise taxes are imposed under section 4965 on certain tax-exempt organizations entering into prohibited tax shelter transactions. Ri 1040nr See T. Ri 1040nr D. Ri 1040nr 9492, Excise Taxes on Prohibited Tax Shelter Transactions and Related Disclosure Requirements, 2010-33 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 242. Ri 1040nr See IRS Issues Final Regulations Regarding Excise Taxes on Prohibited Tax Shelter Transactions and Related Disclosure Requirement. Ri 1040nr Pension Protection Act of 2006 tax changes. Ri 1040nr The Pension Protection Act of 2006 made numerous changes to the tax law provisions affecting tax-exempt organizations. Ri 1040nr Unless otherwise noted, most of the changes became effective on August 17, 2006. Ri 1040nr For key provisions, go to The Pension Protection Act of 2006. Ri 1040nr Section 501(c)(3) organizations must make their Form 990-T, Exempt Organization Business Tax Return (and proxy tax under section 6033(e)), open for public inspection for a period of 3 years from the date the Form 990-T is required to be filed (determined with regard to any extension of time for filing) or is actually filed, whichever is later. Ri 1040nr There is an increase in excise taxes relating to public charities, social welfare organizations, and private foundations. Ri 1040nr There are additional standards for credit counseling organizations. Ri 1040nr The definition of convention or association of churches has been modified. Ri 1040nr Entities that are not required to file Form 990 or 990-EZ must file new Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ. Ri 1040nr The requirements of disclosure to state officials relating to exempt organizations has been modified. Ri 1040nr There are excise taxes imposed on excess benefit transactions involving donor advised funds and sponsoring organizations. Ri 1040nr There are new excise taxes on prohibited tax shelter transactions. Ri 1040nr There is a modification of recordkeeping requirements for certain charitable contributions. Ri 1040nr Introduction This publication discusses the rules and procedures for organizations that seek recognition of exemption from federal income tax under section 501(a) of the Internal Revenue Code (the Code). Ri 1040nr It explains the procedures you must follow to obtain an appropriate ruling or determination letter recognizing your organization's exemption, as well as certain other information that applies generally to all exempt organizations. Ri 1040nr To qualify for exemption under the Code, your organization must be organized for one or more of the purposes specifically designated in the Code. Ri 1040nr Organizations that are exempt under section 501(a) include those organizations described in section 501(c). Ri 1040nr Section 501(c) organizations are covered in this publication. Ri 1040nr Chapter 1, Application, Approval, and Appeal Procedures, provides general information about the procedures for obtaining recognition of tax-exempt status. Ri 1040nr Chapter 2, Filing Requirements and Required Disclosures, contains information about annual filing requirements and other matters that may affect your organization's tax-exempt status. Ri 1040nr Chapter 3, Section 501(c)(3) Organizations, contains detailed information on various matters affecting section 501(c)(3) organizations, including a section on the determination of private foundation status. Ri 1040nr Chapter 4, Other Section 501(c) Organizations, includes separate sections for specific types of organizations described in section 501(c). Ri 1040nr Chapter 5, Excise Taxes, provides information on when excise taxes may be imposed. Ri 1040nr Organizations not discussed in this publication. Ri 1040nr Certain organizations that may qualify for exemption are not discussed in this publication, although they are included in the Organization Reference Chart. Ri 1040nr These organizations (and the Code sections that apply to them) are as follows. Ri 1040nr Corporations organized under Acts of Congress 501(c)(1) Teachers' retirement fund associations 501(c)(11) Mutual insurance companies 501(c)(15) Corporations organized to finance crop operations 501(c)(16) Employee funded pension trusts (created before June 25, 1959) 501(c)(18) Withdrawal liability payment fund 501(c)(22) Veterans' organizations (created before 1880) 501(c)(23) National Railroad Retirement Investment Trust 501(c)(28) Religious and apostolic associations 501(d) Cooperative hospital service organizations 501(e) Cooperative service organizations of operating educational organizations 501(f) Section 501(c)(24) organizations (section 4049 ERISA trusts) are neither discussed in the text nor listed in the Organization Reference Chart. Ri 1040nr Similarly, farmers' cooperative associations that qualify for exemption under section 521, qualified state tuition programs described in section 529, and pension, profit-sharing, and stock bonus plans described in section 401(a) are not discussed in this publication. Ri 1040nr If you think your organization falls within one of these categories, contact the IRS for any additional information you need. Ri 1040nr For telephone assistance, call 1-877-829-5500. Ri 1040nr Check the Table of Contents at the beginning of this publication to determine whether your organization is described in this publication. Ri 1040nr If it is, read the chapter (or section) that applies to your type of organization for the specific information you must give when applying for recognition of exemption. Ri 1040nr Organization Reference Chart. Ri 1040nr The Organization Reference Chart enables you to locate at a glance the section of the Code under which your organization might qualify for exemption. Ri 1040nr It also shows the required application form and, if your organization meets the exemption requirements, the annual return to be filed (if any), and whether or not a contribution to your organization will be deductible by a donor. Ri 1040nr It also describes each type of qualifying organization and the general nature of its activities. Ri 1040nr You may use the Organization Reference Chart to determine the Code section that you think applies to your organization. Ri 1040nr Any correspondence with the IRS (in requesting forms or otherwise) will be expedited if you indicate in your correspondence the appropriate Code section. Ri 1040nr Check the IRS website, IRS. Ri 1040nr gov, for the latest updates, Tax Information for Charities & Other Non-Profits, www. Ri 1040nr irs. Ri 1040nr gov/charities/index. Ri 1040nr html. Ri 1040nr Comments and suggestions. Ri 1040nr We welcome your comments about this publication and your suggestions for future editions. Ri 1040nr You can e-mail us while visiting our website at IRS. Ri 1040nr gov. Ri 1040nr You can send your comments to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Ri 1040nr NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Ri 1040nr Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Ri 1040nr If you wish telephone assistance, please call 1-877-829-5500. Ri 1040nr This toll-free telephone service is available Monday through Friday. Ri 1040nr Prev Up Next Home More Online Publications
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Ri 1040nr 5. Ri 1040nr Taxes Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: When To Deduct Taxes Real Estate TaxesSeparate elections. Ri 1040nr Making the election. Ri 1040nr Form 3115. Ri 1040nr Income TaxesAccrual of contested income taxes. Ri 1040nr Employment Taxes Other TaxesAdditional Medicare Tax. Ri 1040nr What's New Additional Medicare Tax. Ri 1040nr Beginning in 2013, you must withhold a 0. Ri 1040nr 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Ri 1040nr Also, self-employed individuals may be required to pay Additional Medicare Tax on self-employment income. Ri 1040nr See Employment Taxes , and Self-employment tax , later. Ri 1040nr Introduction You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses. Ri 1040nr You cannot deduct federal income taxes, estate and gift taxes, or state inheritance, legacy, and succession taxes. Ri 1040nr Topics - This chapter discusses: When to deduct taxes Real estate taxes Income taxes Employment taxes Other taxes Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 334 Tax Guide for Small Business 510 Excise Taxes 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch SE (Form 1040) Self-Employment Tax 3115 Application for Change in Accounting Method 8959 Additional Medicare Tax See chapter 12 for information about getting publications and forms. Ri 1040nr When To Deduct Taxes Generally, you can only deduct taxes in the year you pay them. Ri 1040nr This applies whether you use the cash method or an accrual method of accounting. Ri 1040nr Under an accrual method, you can deduct a tax before you pay it if you meet the exception for recurring items discussed under Economic Performance in Publication 538. Ri 1040nr You can also elect to ratably accrue real estate taxes as discussed later under Real Estate Taxes . Ri 1040nr Limit on accrual of taxes. Ri 1040nr A taxing jurisdiction can require the use of a date for accruing taxes that is earlier than the date it originally required. Ri 1040nr However, if you use an accrual method, and can deduct the tax before you pay it, use the original accrual date for the year of change and all future years to determine when you can deduct the tax. Ri 1040nr Example. Ri 1040nr Your state imposes a tax on personal property used in a trade or business conducted in the state. Ri 1040nr This tax is assessed and becomes a lien as of July 1 (accrual date). Ri 1040nr In 2013, the state changed the assessment and lien dates from July 1, 2014, to December 31, 2013, for property tax year 2014. Ri 1040nr Use the original accrual date (July 1, 2014) to determine when you can deduct the tax. Ri 1040nr You must also use the July 1 accrual date for all future years to determine when you can deduct the tax. Ri 1040nr Uniform capitalization rules. Ri 1040nr Uniform capitalization rules apply to certain taxpayers who produce real property or tangible personal property for use in a trade or business or for sale to customers. Ri 1040nr They also apply to certain taxpayers who acquire property for resale. Ri 1040nr Under these rules, you either include certain costs in inventory or capitalize certain expenses related to the property, such as taxes. Ri 1040nr For more information, see chapter 1. Ri 1040nr Carrying charges. Ri 1040nr Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Ri 1040nr You can elect to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Ri 1040nr For more information, see chapter 7. Ri 1040nr Refunds of taxes. Ri 1040nr If you receive a refund for any taxes you deducted in an earlier year, include the refund in income to the extent the deduction reduced your federal income tax in the earlier year. Ri 1040nr For more information, see Recovery of amount deducted (tax benefit rule) in chapter 1. Ri 1040nr You must include in income any interest you receive on tax refunds. Ri 1040nr Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. Ri 1040nr The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Ri 1040nr Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. Ri 1040nr See Taxes for local benefits , later. Ri 1040nr If you use an accrual method, you generally cannot accrue real estate taxes until you pay them to the government authority. Ri 1040nr However, you can elect to ratably accrue the taxes during the year. Ri 1040nr See Electing to ratably accrue , later. Ri 1040nr Taxes for local benefits. Ri 1040nr Generally, you cannot deduct taxes charged for local benefits and improvements that tend to increase the value of your property. Ri 1040nr These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. Ri 1040nr You should increase the basis of your property by the amount of the assessment. Ri 1040nr You can deduct taxes for these local benefits only if the taxes are for maintenance, repairs, or interest charges related to those benefits. Ri 1040nr If part of the tax is for maintenance, repairs, or interest, you must be able to show how much of the tax is for these expenses to claim a deduction for that part of the tax. Ri 1040nr Example. Ri 1040nr To improve downtown commercial business, Waterfront City converted a downtown business area street into an enclosed pedestrian mall. Ri 1040nr The city assessed the full cost of construction, financed with 10-year bonds, against the affected properties. Ri 1040nr The city is paying the principal and interest with the annual payments made by the property owners. Ri 1040nr The assessments for construction costs are not deductible as taxes or as business expenses, but are depreciable capital expenses. Ri 1040nr The part of the payments used to pay the interest charges on the bonds is deductible as taxes. Ri 1040nr Charges for services. Ri 1040nr Water bills, sewerage, and other service charges assessed against your business property are not real estate taxes, but are deductible as business expenses. Ri 1040nr Purchase or sale of real estate. Ri 1040nr If real estate is sold, the real estate taxes must be allocated between the buyer and the seller. Ri 1040nr The buyer and seller must allocate the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. Ri 1040nr Treat the seller as paying the taxes up to but not including the date of sale. Ri 1040nr Treat the buyer as paying the taxes beginning with the date of sale. Ri 1040nr You can usually find this information on the settlement statement you received at closing. Ri 1040nr If you (the seller) use an accrual method and have not elected to ratably accrue real estate taxes, you are considered to have accrued your part of the tax on the date you sell the property. Ri 1040nr Example. Ri 1040nr Alberto Verde, a calendar year accrual method taxpayer, owns real estate in Olmo County. Ri 1040nr He has not elected to ratably accrue property taxes. Ri 1040nr November 30 of each year is the assessment and lien date for the current real property tax year, which is the calendar year. Ri 1040nr He sold the property on June 30, 2013. Ri 1040nr Under his accounting method he would not be able to claim a deduction for the taxes because the sale occurred before November 30. Ri 1040nr He is treated as having accrued his part of the tax, 181/366 (January 1–June 29), on June 30, and he can deduct it for 2013. Ri 1040nr Electing to ratably accrue. Ri 1040nr If you use an accrual method, you can elect to accrue real estate tax related to a definite period ratably over that period. Ri 1040nr Example. Ri 1040nr Juan Sanchez is a calendar year taxpayer who uses an accrual method. Ri 1040nr His real estate taxes for the real property tax year, July 1, 2013, to June 30, 2014, are $1,200. Ri 1040nr July 1 is the assessment and lien date. Ri 1040nr If Juan elects to ratably accrue the taxes, $600 will accrue in 2013 ($1,200 × 6/12, July 1–December 31) and the balance will accrue in 2014. Ri 1040nr Separate elections. Ri 1040nr You can elect to ratably accrue the taxes for each separate trade or business and for nonbusiness activities if you account for them separately. Ri 1040nr Once you elect to ratably accrue real estate taxes, you must use that method unless you get permission from the IRS to change. Ri 1040nr See Form 3115 , later. Ri 1040nr Making the election. Ri 1040nr If you elect to ratably accrue the taxes for the first year in which you incur real estate taxes, attach a statement to your income tax return for that year. Ri 1040nr The statement should show all the following items. Ri 1040nr The trades or businesses to which the election applies and the accounting method or methods used. Ri 1040nr The period to which the taxes relate. Ri 1040nr The computation of the real estate tax deduction for that first year. Ri 1040nr Generally, you must file your return by the due date (including extensions). Ri 1040nr However, if you timely filed your return for the year without electing to ratably accrue, you can still make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Ri 1040nr Attach the statement to the amended return and write “Filed pursuant to section 301. Ri 1040nr 9100-2” on the statement. Ri 1040nr File the amended return at the same address where you filed the original return. Ri 1040nr Form 3115. Ri 1040nr If you elect to ratably accrue real estate taxes for a year after the first year in which you incur real estate taxes, or if you want to revoke your election to ratably accrue real estate taxes, file Form 3115. Ri 1040nr For more information, including applicable time frames for filing, see the Instructions for Form 3115. Ri 1040nr Note. Ri 1040nr If you are filing an application for a change in accounting method filed after January 9, 2011, for a year of change ending after April 29, 2010, see Revenue Procedure 2011-14, 2011-4 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 330, as modified and clarified by Revenue Procedure 2012-19, 2012-14 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 689, and Revenue Procedure 2012-20, 2012-14 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 700, or any successor. Ri 1040nr Revenue Procedure 2011-14 is available at www. Ri 1040nr irs. Ri 1040nr gov/irb/2011-04IRB/ar08. Ri 1040nr html. Ri 1040nr Income Taxes This section discusses federal, state, local, and foreign income taxes. Ri 1040nr Federal income taxes. Ri 1040nr You cannot deduct federal income taxes. Ri 1040nr State and local income taxes. Ri 1040nr A corporation or partnership can deduct state and local income taxes imposed on the corporation or partnership as business expenses. Ri 1040nr An individual can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Ri 1040nr However, an individual can deduct a state tax on gross income (as distinguished from net income) directly attributable to a trade or business as a business expense. Ri 1040nr Accrual of contested income taxes. Ri 1040nr If you use an accrual method, and you contest a state or local income tax liability, you must accrue and deduct any contested amount in the tax year in which the liability is finally determined. Ri 1040nr If additional state or local income taxes for a prior year are assessed in a later year, you can deduct the taxes in the year in which they were originally imposed (the prior year) if the tax liability is not contested. Ri 1040nr You cannot deduct them in the year in which the liability is finally determined. Ri 1040nr The filing of an income tax return is not considered a contest and, in the absence of an overt act of protest, you can deduct the tax in the prior year. Ri 1040nr Also, you can deduct any additional taxes in the prior year if you do not show some affirmative evidence of denial of the liability. Ri 1040nr However, if you consistently deduct additional assessments in the year they are paid or finally determined (including those for which there was no contest), you must continue to do so. Ri 1040nr You cannot take a deduction in the earlier year unless you receive permission to change your method of accounting. Ri 1040nr For more information on accounting methods, see When Can I Deduct an Expense in chapter 1. Ri 1040nr Foreign income taxes. Ri 1040nr Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U. Ri 1040nr S. Ri 1040nr possession. Ri 1040nr However, an individual cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U. Ri 1040nr S. Ri 1040nr tax under the foreign earned income exclusion or the foreign housing exclusion. Ri 1040nr For information on these exclusions, see Publication 54, Tax Guide for U. Ri 1040nr S. Ri 1040nr Citizens and Resident Aliens Abroad. Ri 1040nr For information on the foreign tax credit, see Publication 514, Foreign Tax Credit for Individuals. Ri 1040nr Employment Taxes If you have employees, you must withhold various taxes from your employees' pay. Ri 1040nr Most employers must withhold their employees' share of social security, Medicare taxes, and Additional Medicare Tax (if applicable) along with state and federal income taxes. Ri 1040nr You may also need to pay certain employment taxes from your own funds. Ri 1040nr These include your share of social security and Medicare taxes as an employer, along with unemployment taxes. Ri 1040nr Note. Ri 1040nr Additional Medicare Tax is only imposed on the employee. Ri 1040nr There is no employer share of Additional Medicare Tax. Ri 1040nr Your deduction for wages paid is not reduced by the social security and Medicare taxes, Additional Medicare Tax, and income taxes you withhold from your employees. Ri 1040nr You can deduct the employment taxes you must pay from your own funds as taxes. Ri 1040nr Example. Ri 1040nr You pay your employee $18,000 a year. Ri 1040nr However, after you withhold various taxes, your employee receives $14,500. Ri 1040nr You also pay an additional $1,500 in employment taxes. Ri 1040nr You should deduct the full $18,000 as wages. Ri 1040nr You can deduct the $1,500 you pay from your own funds as taxes. Ri 1040nr For more information on employment taxes, see Publication 15 (Circular E). Ri 1040nr Unemployment fund taxes. Ri 1040nr As an employer, you may have to make payments to a state unemployment compensation fund or to a state disability benefit fund. Ri 1040nr Deduct these payments as taxes. Ri 1040nr Other Taxes The following are other taxes you can deduct if you incur them in the ordinary course of your trade or business. Ri 1040nr Excise taxes. Ri 1040nr Generally, you can deduct as a business expense all excise taxes that are ordinary and necessary expenses of carrying on your trade or business. Ri 1040nr However, see Fuel taxes , later. Ri 1040nr For more information on excise taxes, see Publication 510. Ri 1040nr Franchise taxes. Ri 1040nr You can deduct corporate franchise taxes as a business expense. Ri 1040nr Fuel taxes. Ri 1040nr Generally, taxes on gasoline, diesel fuel, and other motor fuels that you use in your business are included as part of the cost of the fuel. Ri 1040nr Do not deduct these taxes as a separate item. Ri 1040nr You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. Ri 1040nr For more information, see Publication 510. Ri 1040nr Occupational taxes. Ri 1040nr You can deduct as a business expense an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. Ri 1040nr Personal property tax. Ri 1040nr You can deduct any tax imposed by a state or local government on personal property used in your trade or business. Ri 1040nr Sales tax. Ri 1040nr Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. Ri 1040nr If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. Ri 1040nr If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. Ri 1040nr If the property is depreciable, add the sales tax to the basis for depreciation. Ri 1040nr For more information on basis, see Publication 551. Ri 1040nr Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Ri 1040nr Also, do not include these taxes in gross receipts or sales. Ri 1040nr Self-employment tax. Ri 1040nr You can deduct part of your self-employment tax as a business expense in figuring your adjusted gross income. Ri 1040nr This deduction only affects your income tax. Ri 1040nr It does not affect your net earnings from self-employment or your self-employment tax. Ri 1040nr To deduct the tax, enter on Form 1040, line 27, the amount shown on the Deduction for one-half of self-employment tax line of Schedule SE (Form 1040). Ri 1040nr For more information on self-employment tax, see Publication 334. Ri 1040nr Additional Medicare Tax. Ri 1040nr Beginning in 2013, you may be required to pay Additional Medicare Tax on self-employment income. Ri 1040nr See Form 8959 and the Instructions for Form 8959 for more information on the Additional Medicare Tax. Ri 1040nr Prev Up Next Home More Online Publications