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The assessments for construction costs are not deductible as taxes or as business expen- ses, but are depreciable capital expenses. The part of the payments used to pay the interest charges on the bonds is deductible as taxes. Charges for services. Water bills, sewerage, and other service charges assessed against your business property are not real estate taxes, but are deductible as business expen- ses. Purchase or sale of real estate. If real estate is sold, the real estate taxes must be allocated between the buyer and the seller. The buyer and seller must allocate the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. Treat the seller as paying the taxes up to but not including the date of sale. Treat the buyer as paying the taxes beginning with the date of sale. You can usually find this informa- tion on the settlement statement you received at closing. If you (the seller) use an accrual method and have not elected to ratably accrue real estate taxes, you are considered to have accrued your part of the tax on the date you sell the property. Example. Alberto Verde, a calendar year accrual method taxpayer, owns real estate in Olmo County. He has not elected to ratably ac- crue property taxes. November 30 of each year is the assessment and lien date for the current real property tax year, which is the calendar year. He sold the property on June 30, 2018. Under his accounting method, he would not be able to claim a deduction for the taxes because the sale occurred before November 30. He is treated as having accrued his part of the tax, 181/366 (January 1–June 29), on June 30, and he can deduct it for 2018. Electing to ratably accrue. If you use an ac- crual method, you can elect to accrue real es- tate tax related to a definite period ratably over that period. Example. Juan Sanchez is a calendar year taxpayer who uses an accrual method. His real estate taxes for the real property tax year, July 1, 2018, to June 30, 2019, are $1,200. July 1 is the assessment and lien date. If Juan elects to ratably accrue the taxes, $600 will accrue in 2018 ($1,200 × 6/12, July 1– December 31) and the balance will accrue in 2019. Separate elections. You can elect to rata- bly accrue the taxes for each separate trade or business and for nonbusiness activities if you account for them separately. Once you elect to ratably accrue real estate taxes, you must use that method unless you get permission from the IRS to change. See Form 3115, later. Making the election. If you elect to ratably accrue the taxes for the first year in which you incur real estate taxes, attach a statement to your income tax return for that year. The state- ment should show all the following items. • The trades or businesses to which the election applies and the accounting method or methods used. • The period to which the taxes relate. • The calculation of the real estate tax de- duction for that first year. Generally, you must file your return by the due date (including extensions). However, if you timely filed your return for the year without electing to ratably accrue, you can still make the election by filing an amended return within 6 months after the due date of the return (exclud- ing extensions). Attach the statement to the amended return and write “Filed pursuant to section 301.9100-2” on the statement. File the amended return at the same address where you filed the original return. Form 3115. If you elect to ratably accrue real estate taxes for a year after the first year in which you incur real estate taxes, or if you want to revoke your election to ratably accrue real estate taxes, file Form 3115. For more informa- tion, including applicable time frames for filing, see the Instructions for Form 3115. Income Taxes This section discusses federal, state, local, and foreign income taxes. Federal income taxes. You cannot deduct federal income taxes. State and local income taxes. A corporation or partnership can deduct state and local in- come taxes imposed on the corporation or part- nership as business expenses. An individual can deduct state and local in- come taxes only as an itemized deduction on Schedule A (Form 1040), subject to limitations. The deduction is limited to $10,000 as a total of the following taxes. 1. State and local income taxes or general sales taxes. See the Schedule A (Form 1040) instructions. 2. State and local real estate taxes. See the Schedule A (Form 1040) instructions. 3. State and local personal property taxes. 4. Other taxes. See the Schedule A (Form 1040) instructions. However, an individual can deduct a state tax on gross income (as distinguished from net income) directly attributable to a trade or busi- ness as a business expense. Accrual of contested income taxes. If you use an accrual method, and you contest a state or local income tax liability, you must ac- crue and deduct any contested amount in the tax year in which the liability is finally deter- mined. If additional state or local income taxes for a prior year are assessed in a later year, you can deduct the taxes in the year in which they were originally imposed (the prior year) if the tax lia- bility is not contested. You cannot deduct them in the year in which the liability is finally deter- mined. The filing of an income tax return is not considered a contest and, in the ab- sence of an overt act of protest, you can deduct the tax in the prior year. Also, you can deduct any additional taxes in the prior year if you do not show some affirmative evidence of denial of the liability. However, if you consistently deduct addi- tional assessments in the year they are paid or finally determined (including those for which there was no contest), you must continue to do so. You cannot take a deduction in the earlier year unless you receive permission to change your method of accounting. For more informa- tion on accounting methods, see When Can I Deduct an Expense in chapter 1. Foreign income taxes. Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U.S. possession, subject to limitations. How- ever, an individual cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U.S. tax under the foreign earned income exclusion or the foreign housing exclusion. For information on these exclusions, see Pub. 54. For information on the foreign tax credit, see Pub. 514. Employment Taxes If you have employees, you must withhold vari- ous taxes from your employees' pay. Most em- ployers must withhold their employees' share of social security, Medicare taxes, and Additional Medicare Tax (if applicable), along with state and federal income taxes. You may also need to pay certain employment taxes from your own funds. These include your share of social secur- ity and Medicare taxes as an employer, along with unemployment taxes. Your deduction for wages paid is not re- duced by the social security and Medicare taxes, Additional Medicare Tax, and income taxes you withhold from your employees. You can deduct the employment taxes you must pay from your own funds as taxes. Example. You pay your employee $18,000 a year. However, after you withhold various taxes, your employee receives $14,500. You also pay an additional $1,500 in employment taxes. You should deduct the full $18,000 as wages. You can deduct the $1,500 you pay from your own funds as taxes. Additional Medicare Tax. You must withhold a 0.9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. The Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax. For more information on the Additional Med- icare Tax, see Form 8959 and its instructions. For more information on employment taxes, see Pub. 15 (Circular E). Unemployment fund taxes. As an employer, you may have to make payments to a state un- employment compensation fund or to a state TIP TIP Chapter 5 Taxes Page 19