Real Estate Agents are required to pay many types of business-related taxes. They pay sales tax on purchases, property taxes on business vehicles, real estate, and business equipment, payroll taxes on employee’s payroll, business and occupational taxes, income tax municipal taxes, and several government fees. Agents also pay for numerous licenses required to do business, such as business licenses, state organizational fees, and the cost of obtaining and renewing real estate licenses.
Tax and license fees paid by Real Estate Agents are deductible on Line 23, Taxes and Licenses, of Schedule C. Many taxes and license fees get deducted on this line. Others are deducted elsewhere on Schedule C. Some aren’t deductible at all. This article, drawn from our Real Estate Agent, Tax-Cut Library, will help you accurately report tax and license costs on Line 23 (and make sure you do not expense costs that are illegal to deduct).
Taxes are levies imposed by government entities during the ordinary course of business. Interestingly, many taxes paid by agents do not get reported on the line called “Taxes and Licenses,” and some of the most significant duties paid by a realtor are not deductible as business expenses (or deductible at all!).
Here’s a list of taxes commonly deducted on Line 23, Taxes and Licenses:
- Employee Payroll Taxes: If you have employees, deduct EMPLOYER-paid taxes in Line 23. Employer taxes include the employer’s share/match of Social Security and Medicare, State Unemployment, Federal Unemployment, and other state, county, or city levies imposed on employers. Payroll taxes do NOT include taxes withheld from employees’ pay for federal income tax, state income tax, local income tax, Social Security, or Medicare.
- Business and Occupation (B&O) Tax: Taxes posed on a company for the right to do business in a particular jurisdiction (generally state or municipality) get deducted on line 23. B&O tax often gets calculated as a percentage of gross sales. Do not confuse business and occupation taxes with sales tax, which is also imposed by many municipalities. Purchasers pay sales tax, and the seller remits it to the taxing authority. It is neither income nor an expense to the business making the sale.
- Personal Property Tax: Deduct property tax paid on business-owned personal property (such as furniture, fixtures, equipment, and computers) as Taxes and Licenses. Do not deduct property tax assessed on a business auto on Line 23. Report vehicle-related taxes (including registration fees) on Line 9, Car and Truck Expenses, if claiming actual auto expenses. For more information on auto taxes and fees, please read our article on Deducting Actual Auto Expenses.
- Real Estate Taxes: If your business owns real estate, deduct related property tax on Line 23. Do not, however, deduct property tax paid on your home that includes a home office or a project assessment that increases the value of your property (see Taxes Not Deductible below).
- Other Deductible Taxes: Although super-rare for Real Estate Agents, Excise taxes (levied on manufactured goods) and Federal Highways Taxes (tax on large highway vehicles) get deducted on Line 23.
Taxes NOT Deducted on Line 23: There are quite a few taxes that get deducted elsewhere on schedule C and a some you cannot deduct at all. Here’s a list:
- Owner’s Income Taxes: This is by far the most common and consequential Line 23 error made by agents who prepare their returns. Federal, state, and local income taxes are NOT deductible on Schedule C. They are NOT deductible, even if paid on income generated by your business. State and local income tax paid during the year may be allowed as an itemized deduction within the Tax Cut and Jobs Act limits.
- Self-Employment Tax: Self-employment tax paid by a business owner on business income are NOT deductible on Schedule C. Half of the self-employment tax assessed on business income is deducted as an adjustment to income on Form 1040. Self-employment tax represents Social Security and Medicare paid by business income. For many Real Estate Agents, it represents the most substantial tax paid on their income. For more information on self-employment tax, please read our article on Real Estate Agents and Self-Employment Tax. If you want to cut all of your self-employment and income taxes, please ask your broker to purchase our Real Estate Agent Tax-Cut Library.
- Taxes on the Home Office: Do not deduct real estate taxes paid on your home that includes your home office on Line 23. They are deducted on Form 8829 when deducting actual home office expenses. For more information on actual home office expenses, please see our article, Home Office Deduction Actual Cost Method Part One.
- Sales Tax on Purchases: Include sales tax paid on purchases in the purchase price of the items. Do not deduct sales tax separately. Deducting sales tax is another reason to buy business items separately from personal-use items. When a receipt contains ten personal items and three business items, it’s easy to forget to include sales tax in the cost of the business items purchased. Remember: Small deductions can add up to substantial tax savings!
- Property Tax on Business Auto: As mentioned above, the property tax paid on a business-use vehicle gets deducted on Line 9 as a car and truck expense (when using the actual cost method). Property tax is not deductible if claiming the business standard mileage rate. For more information on deducting auto taxes and fees, please read our article on Deducting Actual Auto Expenses
- Project Taxes and Assessments: Taxes and levies for special projects that increase the value of your home (office) or business real estate (such as the city putting in a sidewalk on your property) do not get expensed directly. Instead, these costs are added to the value of the property and depreciated as required.
- Employees Withholdings and Taxes: Do not deduct income tax withholding and payroll deductions for employee Social Security and Medicare on Line 23. These taxes get included in gross pay and deducted as Wages on Line 26 of Schedule C.
- Fees for Government Provided Services such as water, sewer, and trash removal are not taxes. Generally, these costs are considered utilities.
Licenses are certifications required to conduct business in a jurisdiction or specific profession. Real Estate Agents pays the government and professional regulatory agencies for a variety of licenses. Here’s a list of deductible, routinely purchased licenses:
- Business Licenses for state, counties, and municipalities.
- Fees for Real Estate License paid to state authorities or governing bodies.
- Application Fees paid to the licensing authorities of other states.
- Organizational Registration and Renewal Fees paid for items such as LLC Articles of Organization with the Secretary of State. Note: payments made before going into business may only be deductible as organizational costs. For more information, please read our article Real Estate Agents Are License Exam Fees and Training Deductible.
- Business Licensing Costs paid to do business in another state as a “foreign” entity.
License Costs Not Deductible on Line 23: Several licensing fees do not get deducted as Taxes and Licenses on Line 23 of Schedule C:
- Special Government License fees such as those to sell liquor, operate a taxi service or run a broadcast medium such as radio or television. You probably don’t know many real estate agents holding such licenses, but if you do, let them know that these costs get amortized over the licensing period.
- Dues and Memberships with professional organizations get deducted as an Other Expense.
- Fees for Services such as those to participate in a Multiple Listing Service are not a Tax or License. These are an Other Expense deducted on Line 27. One could also argue that service fees required to promote listings properties are advertising expenses.
Take Away: Tax and License Costs deducted on Line 23 of Schedule C are business costs imposed by the government or professional governing agency for property ownership or the privilege of doing business. As with many Schedule C deductions, not all items called taxes or licenses are not deductible as business expenses on the most obvious line. Others are not deductible at all, particularly federal, state, and self-employment tax income tax.
Summary and Invite: We hope this article helps you to understand better the deductibility of Taxes and Licenses on Schedule C. If you’d like to learn more about cutting your highest cost: TAXES, check out our Real Estate Agent Tax-Cut Library. The Real Estate Agent Tax-Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.