How do I account for federal tax payments?
If you pay estimated taxes or you pay your taxes all at once, you’ll want to make sure you are accounting for this correctly.
Basically the IRS says you cannot deduct federal income taxes as a business, so these transactions you want to make sure you are not entering as an expense.
See IRS Publication 535 Chapter 5 for more detail on deductible taxes: “You cannot deduct federal income taxes, estate and gift taxes, or state inheritance, legacy, and succession taxes.”
Depending on how your business it taxed, usually small business owners either get a K-1 or fill out a Schedule C for their business. This means that the business owner personally pays federal taxes. Therefore you can’t take federal tax payments as a deduction in the business itself.
When these taxes are paid (usually from the business bank account) these transactions should be treated as an equity transaction.
Keep in mind that a C Corporation (which is treated as an entity in itself) will deal with these transactions differently! It’s always a good idea to ask your tax accountant about your specific situation.