Small business tax help website
 

Where to Deduct Taxes and Interest?

Where to deduct taxes and interest on a tax return depends on the legal structure of your small business.

Employees

Taxes and interest are tax deductible for employees as miscellaneous business expenses reported on Schedule A and is subject to the 2% adjusted gross income limit. Employees cannot claim taxed and interest deduction if they are less than 2% of his or her adjusted gross income.

Self employed individuals

Taxes and interest are tax deductible for self employed business owners on Schedule C (or Schedule F in the case of farming operations). Schedule C itemizes claims for tax deductions for mortgage interest as well as other interests.

A sole proprietor can deduct foreign taxes on Schedule C or Schedule F or may choose to claim foreign tax credit. If the foreign taxes are $300 or less ($600 if married filing jointly) and result from passive income, an election can be made to claim the tax credit directly on the IRS form 1040. If not, the tax credit must be calculated on the tax form 1116, Foreign Tax Credit.

Partnerships and LLCs

Partnerships and Limited Liability Companies (LLCs) deduct taxes and interest on the tax form 1065. These items are part of the business' operating expenses and calculated into its income and loss passed through to partners or LLC members on Schedule K-1 and then reported on the owner's Schedule E. If interests are investment interests then they are separately stated in Schedule K-1. Foreign taxes are also separately stated on Schedule K-1.

S Corporations

S corporations deduct taxes and interest on Form 1120S as part of business' operating expenses figured into the income and loss passes through to shareholders of the S Corporation on Schedule K-1. They are then reported on the owner's Schedule E.

C Corporations

C corporations deduct taxes and interest on the IRS tax Form 1120.