SALES TAX PAYMENT DEDUCTION

[Max W]

Client had a corp. Sales tax was included in Gross Sales.

Corp was closed and client became personally responsible for sales tax.

That was paid personally.

Can that be taken as a deduction?  Sched A, 2%?

TIA

[Margaret CPA in OH]

Sales tax collection is a fiduciary responsibility.  The money did not belong to the client, it belonged to the state.  Client was personally responsible as a fiduciary, money never belonged to the client so cannot be a deduction to the client.  There likely should be/have been an adjustment to gross sales leading to net profit or loss, however reported.

Unremitted sales tax and payroll tax has been the problem with many small businesses that use that cash as a personal cash account.

[Jack from Ohio]

Agree with Margaret.

The sales tax amount can be deducted from the gross sales amount of the company.  It should never have been added to begin with.

No other deduction. 

Sales tax is not part of the sales transaction.  Most small businesses do not understand the fiduciary nature of collected sales tax.

[Max W]

While I agree with what you are both saying, the corp return reported Gross Sales which included sales tax. The tax return did not break this out and it wasn't paid at the time. Since the tax was included in gross sales, it could have been offset as an expense. I did state that she was personally (fiduciary) responsible.

My question goes to the payment of the sales tax since it was never offset from the Gross originally..  

[Max W]

Anyway, I see the solution is to amend the Corporate returns, then the client gets no deduction for the sales tax payments.

[jklcpa]

Even with amending the corp returns to remove the sales tax from revenues, it would then shift to a liability of the corporation on the balance sheet, not an expense.  Had it been recorded properly when it was collected at the time of the sale, it would have increased cash and increased the liability account. Had the corporation been the entity that paid it, it would have decreased cash, decreased the liability.  As I see it, this liability should have been distributed to the shareholder at dissolution of the corporation. Has the final return for the corporation been filed?

[mircpa]

Assuming this is an S corporation. If sales taxes were included in gross sales then sales tax deduction can be taken in corporate tax returns AND this might reduce income so less amount of K1 (subject to basis limitation) . Since corporation is already closed therefore amended tax return is only solution.

[jklcpa]

Assuming this is an S corporation. If sales taxes were included in gross sales then sales tax deduction can be taken in corporate tax returns AND this might reduce income so less amount of K1 (subject to basis limitation) . Since corporation is already closed therefore amended tax return is only solution.

 

I will respectfully disagree with you on this.

The sales tax collected by a business on its sales or revenues that is to be remitted to the state or local government that is imposing the tax is collected in a fiduciary capacity, and those funds do not belong to the company and should not ever be included in revenue or expense. They are a liability of the company until remitted to the tax department to which they are owed.

The sales tax payments that a business may include in its costs or expenses are those sales taxes the business pays on merchandise it purchases for resale and that are included in COS, in basis of its depreciable assets, or as part of service costs provided to the business.

Please note that this is specifically addressed in Pub 334, Tax Guide for Small Business, in the "Taxes" section with a caution:

Sales tax.    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. 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. If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. If the property is depreciable, add the sales tax to the basis for depreciation. For information on the basis of property, see Publication 551, Basis of Assets.

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. Do not include these taxes in gross receipts or sales.

[mircpa]

I do know businesses entity has fiduciary duty to remit collected sales taxes BUT then if you see Max's post it says sales tax was included in gross sales. It is based on this premise I wrote whatever I wrote.

[Jack from Ohio]

I do know businesses entity has fiduciary duty to remit collected sales taxes BUT then if you see Max's post it says sales tax was included in gross sales. It is based on this premise I wrote whatever I wrote.

The fact that the bookkeeper did not know (no real excuse) does not change the nature of the sales tax collected from customer.  It does NOT belong to, nor should ever be included in the business's sales, expenses or balance sheet. (again, no valid excuse) It is fiduciary money that belongs to the State.  Hence the reason the owner became personally liable.  States do not relent when collecting "trust fund" money.

[Abby Normal]

nor should ever be included in the business's sales, expenses or balance sheet. (again, no valid excuse)

It does belong on the balance sheet as a liability. The question here is what is the effect of passing that liability out to the shareholder. I think, as the shareholder pays it, it increases the stock basis allowing any suspended losses to be claimed.

But in this case, the stock basis was already increased by virtue of the sales tax being included in revenue. Which actually makes it simpler. No deduction for the shareholder when the sales tax is paid personally.

[jklcpa]

Agree with jmdavis on this and that is what I was getting at earlier.  The thing is though, we don't know if this was a C or an S corp. MaxW didn't specify; it was mircpa that brought that presumption into the discussion.

[Jack from Ohio]

Agree with jmdavis on this and that is what I was getting at earlier.  The thing is though, we don't know if this was a C or an S corp. MaxW didn't specify; it was mircpa that brought that presumption into the discussion.

How would this have any effect on the deductibility of the sales tax payment made to the state by the taxpayer?

Not deductible, no way, no how on his personal return.  The corp return should be amended using corrected bookkeeping numbers.  That is an issue for the bookkeeper (sic) to workout with the preparer of the corp. return.

[jklcpa]

How would this have any effect on the deductibility of the sales tax payment made to the state by the taxpayer?

Not deductible, no way, no how on his personal return.  The corp return should be amended using corrected bookkeeping numbers.  That is an issue for the bookkeeper (sic) to workout with the preparer of the corp. return.

I never said that paying the sales taxes personally creates a deduction on the personal return. It wouldn't and I should have said I agree with jmdavis with the exception that we don't know if this will effect basis because we don't know if this is a C or S since the OP did not provide that information, someone else made a presumption.  MaxW also did not provide us with where payments of sales taxes, if any, were posted in the company's books, so no one here can say how or where that correction should be made either.

The proper course of action would be to amend the corp returns to reflect amounts as if the transactions were recorded properly in the company's books as I described in my first post in this thread, and any remaining unpaid sales tax that was a liability of the company on its final balance sheet would have to be dealt with when the balance sheet was closed out and final distribution was made to the shareholder. 

Any liability for unpaid sales taxes becomes the responsibility of the stockholder, and its payment does not create a deductible expense on the personal return.