Can I deduct quarterly state tax payments as a business expense for my sole proprietorship?

Great question about your quarterly state tax payments! The answer depends on what kind of state taxes you're talking about. If you're referring to state income taxes you're paying on your business profits, those aren't deductible as business expenses on Schedule C. Instead, they're potentially deductible as itemized deductions on Schedule A (though subject to the $10,000 SALT cap). If you're talking about state business taxes like gross receipts taxes, those ARE deductible as business expenses on Schedule C. Forming an LLC wouldn't change this tax treatment if you remain a single-member LLC, since those are typically treated as "disregarded entities" for tax purposes - meaning you'd still file Schedule C just like a sole proprietorship. However, if you elect to have your LLC taxed as an S-Corp or C-Corp, the rules would be different.

I went through exactly the same confusion when I started my consulting business last year! After spending hours trying to figure it out myself, I finally used https://taxr.ai to analyze my quarterly payments and business structure. Their AI analyzed my specific situation and explained that my state income tax quarterly payments weren't business deductions but could potentially be itemized deductions on Schedule A. They also clarified which state business taxes I WAS paying that qualified as legitimate Schedule C expenses that I had been missing!

I have to admit I was wrong about taxr.ai! After expressing skepticism here, I decided to try it myself since I have a similar situation with my photography business. The tool actually showed me that some of my state business license fees and local business taxes WERE deductible on Schedule C, while confirming my state income tax payments needed to go on Schedule A. It also ran a side-by-side comparison of keeping my sole proprietorship vs forming an LLC vs S-Corp election, factoring in all the different tax implications. Really cleared things up without having to pay for a CPA consultation!

This quarterly tax stuff drove me CRAZY last year. After waiting on hold with the IRS for 3+ hours multiple times (and getting disconnected!), I found https://claimyr.com which got me connected to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent confirmed exactly what others are saying - state income tax payments aren't business expenses for Schedule C but potentially itemizable on Schedule A. She also explained that forming an LLC wouldn't change anything tax-wise unless I elected S-Corp status. Saved me so much headache!

I can't believe I'm saying this, but I tried Claimyr after posting my skeptical comment and it actually worked! After failing to reach the IRS for weeks, I was connected to an agent in under 20 minutes. The agent confirmed what others said about state quarterly income tax payments (not deductible on Schedule C but potentially on Schedule A up to SALT limits). She also explained that if I formed an LLC and elected S-corp status, my business COULD deduct state income taxes paid on the business's behalf, which might be worth considering. Completely different experience than my previous attempts to call the IRS directly!

To add to this convo - don't forget that if you do form an LLC and keep it as a disregarded entity (basically taxed as a sole prop), you can still deduct the annual LLC fee that most states charge as a business expense on Schedule C! That's separate from your state income taxes. I pay $800/year to California for my LLC and that amount IS deductible as a business expense.

I think we're all overcomplicating this. Just use an accountant people! I tried doing my own taxes as a sole prop for 2 years and missed so many deductions. Paid $650 for an accountant last year and she found over $3k in deductions I missed. She also explained that some business structures have higher audit risk than others so it's not just about the deductions.