Do I need to report local business taxes that were charged late?

Question

I live in Los Angeles. After filing my taxes for 2005 (I was self employed that year), I was sent a notice to pay income tax to the city because I was considered a business. I paid this bill in 2006 and closed the business account. Do I need to report this income tax I paid to LA in my 2006 federal and/or state taxes? And, if so where do I list it in the forms?

Answer 1

Since you paid the bill in 2006, you claim the deduction in 2006, not 2005.
Why? Because the majority of taxpayers are on the "cash basis". Income is
reported in the year, when received, and deductions are reported in the year, when paid.

Where to put it? Interesting question. You closed your business account in 2005, which I am assuming was a Schedule C. You have an option. You can
report it as a Schedule C expense in 2006, call it "Licenses and Taxes", show of course zero as income and claim it as a Schedule C net loss.

Or, you can report it on Line 21 "Other Income". Show "Statement Attached"
on LIne 21 and in the amount column show the amount in brackets ( ).
Attach a statement in the back of the return that you filed as a Schedule C
last year and since then you closed the bank account, and then you had to pay an additional bill.

Answer 2

It's a 2006 expense, and if you have other business expenses besides this tax, then include it on the Schedule C (Form 1040) for the business.

If you aren't still in business, and have already filed the final return for the business, then I suggest you carry the city income tax on the Schedule A (Form 1040).

As to the state and local tax forms... I don't know anything much about the CA forms.

Answer 3

If you itemize deductions using Schedule A you can deduct state and local income taxes paid in 2006. If any of that payment included penalties, interest or late fees you cannot deduct that portion of the payment.

If you don't itemize, there is no tax impact and nothing to report.