As a business owner, every penny counts. And it is only natural to want to take full advantage of all business deductions. An often-overlooked area is the taxes and license fees. Although a huge chunk of our paid taxes is non-deductible, the income taxes, there are other taxes and licensing fees that the IRS allows as a business deduction. 

Deductible 

In general, the deductibility of taxes and licenses depends on it being a necessary and ordinary expense for your trade or business operations. You may deduct as a business expense the following taxes and license fees: 

• State-level and local sales taxes imposed on you as seller of goods or services. 

• Real estate and personal property taxes on business assets. 

• Yearly licenses and regulatory fees paid to your state or local governments for your trade or business. 

• Special or temporary permits such as event, filming, temporary occupancy, signage, or street closure permits you secured to perform your trade or service. 

• Federal unemployment tax paid (FUTA).  

• Federal highway use tax, an IRS tax imposed on heavy highway vehicles operating on public roads. 

• Contributions to a state unemployment insurance fund or disability benefit fund if they are considered taxes under a state law. 

• Social security and Medicare taxes paid to match required withholding from your employees’ wages. 

Non-Deductible 

The non-deductibility of taxes and license fees are either due to their very nature or they are simply required to be capitalized rather than deducted as an outright expense. 

• Federal and state income taxes. 

• Self-employment tax. However, half of your self-employment tax can be deducted on your 1040 tax return (Schedule 1). 

• Estate and gift taxes. 

• Taxes assessed to pay for improvements, such as paving and sewers, are considered capital improvements, hence not deductible as an outright expense. 

• Taxes on your home or personal property. However, if your personal property is being used for business purposes, you may deduct the portion related to its business use. 

• State-level and local sales taxes on property purchased for use in your business. Such taxes should be treated as part of the cost of the property. 

• Fees for licenses with a term exceeding one year such as liquor licenses. Such licenses should be amortized over the license period. 

• Other taxes and license fees that are unrelated to your business. 

Want to learn more? 

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