We don’t often think of licensing fees as a tax per se, and may not even see user fees as taxes, but they are all costs mandated by government, when you do business, buy or sell goods, etc.
But taxes are everywhere. They are unavoidable. We know a sales tax, a property tax or an income tax when we see it. But what about all of the other costs we pay to the government? And perhaps most important to you, are they deductible on your federal taxes?
This is an important consideration for any business owner. When you calculate the total amount of licenses, fees and taxes you pay to your state and local governments, it adds up quickly. Have you every stopped to list all of the different fees and licensing costs you actually incur? I remember early on in my days in business for myself, I was paying over 10% of my total revenues in licensing, fees and taxes apart from paying income tax.
So the first consideration with respect to deductions you might be entitled to take is to be sure you included everything that is being paid, more or less directly, to the state, county and city where you do business, as well as all those that have to be paid to do business in other locations as well. There are likely to be redundancies. That are likely to be costs you can’t avoid. But they may be deductible.
The second consideration is to try and accumulate these costs in a manner that enables you to deduct the largest amount you can from your taxes. This is easier said than done. It’s one place a good tax planner or advisor can make a difference for you when it comes time for you to get back some of the money you’ve paid into the system.
Think of licenses and fees the same way a wage earner thinks of tax withholding. In a sense, it’s like a prepayment on your overall tax bill, hopefully with a refund attached to it at the end of the year. The savvy business owner can see this in a way the wage earner can’t – you have money coming back for something you were forced to pay that ultimately resulted in your ability to earn more income – a return on your investment if you will.
Finally, you should think about planning your way around unnecessary license and user fees before they are paid. While this isn’t rocket science, it does take some thought and wise decision making. There is no point that you may need the services of a good tax advisor more than when you are planning ahead for what you could avoid.
Unfortunately for many business owners, sometimes things get out of alignment with your taxes. Excessive overpayments or disallowed deductions can turn a simple reporting matter into a legal nightmare. The Thompson Law Office can assist you when you are faced with a tax dispute that requires the assistance of legal counsel. If you’re facing IRS fines and penalties, don’t hesitate to give them a call.