Guide to Deductible Business Expenses | Part 8: Taxes
Updated: Sep 15
If you missed the first seven parts of our guide to deductible business expenses, you can find them below:
In addition to perhaps more obvious types of deductible expenses, certain federal, state, local, and foreign taxes also qualify as deductible business expenses.
Which taxes can I deduct as business expenses?
Real Estate Taxes
Real estate taxes are most commonly ad-valorem taxes, calculated based on the assessed value of the real estate.These taxes are levied by state and local governments.
You may generally deduct the cost of state and local real estate taxes paid on your business property if those taxes are used for the benefit of the general public. However, businesses generally cannot deduct taxes charged for local benefits and improvements that tend to increase the value of the business’s property.
Examples of non-deductible real estate taxes include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities.
Federal income taxes are not considered deductible business expenses.
However, corporations and partnerships may deduct state and local income taxes as a business expense.
Individuals may deduct state tax imposed on gross income directly attributable to their business as a business expense.
As for foreign income taxes, businesses may generally take either a deduction or a credit for income taxes imposed by a foreign country or US possession, subject to certain limitations.
However, foreign income taxes paid on income exempt from US tax are not eligible for deduction or tax credit.
If your business serves as an employer, you must withhold certain taxes from your employees’ pay:
Social Security tax
State & Federal income taxes
As an employer, you may also be required to pay certain employment taxes from your own funds:
Employer’s share of Medicare & Social Security taxes
Unemployment Insurance (UI) taxes
Because the taxes withheld from your employees’ wages are already included in the wage deduction, you may not deduct this amount as a separate business expense. However, you may deduct your share of Social Security, Medicare, and unemployment taxes as a business expense. Payments made as an employer to a state unemployment compensation fund or state disability benefit fund may also be deducted as business expenses.
You may also deduct part of your self-employment tax as a business expense on your individual tax return. Deducting this amount on your tax return will not affect how much self-employment tax you owe.
You may generally deduct all excise taxes considered to be ordinary and necessary expenses for the running of your business.
However, taxes paid on gasoline, diesel fuel, and any other motor fuels used in your business are usually included in the cost of fuel; do not deduct these taxes as a separate item.
If you paid federal excise tax on fuels used for certain purposes, you may be entitled to a credit or refund. Contact your CPA for more information.
Franchise taxes are levied by some states on certain businesses in exchange for doing business within that state. These taxes are deductible as business expenses.
You may deduct occupational taxes paid at a flat rate for the privilege of working or conducting a business in a certain locality.
Registration fees for the right to use property for business purposes within a state or local area may also be deducted as business expenses.
Personal Property Taxes
If you use personal property in the course of your trade or business, you may deduct state or local taxes imposed upon that property.
Sales tax paid on deductible business expenses such as payments for a service, property, or use of a property in the course of your business is treated as part of the cost of the service or property. Therefore, it must be deducted as part of the total cost of the service or property rather than as a separate tax expense.
When can I deduct taxes as a business expense?
Generally, you may only deduct taxes in the year that you pay them, regardless of whether you employ a cash or accrual-based method of accounting.
However, businesses using the accrual method may be able to deduct certain taxes before payment if the business meets certain exception criteria for recurring items. If you use the accrual method of accounting, contact your CPA with questions on whether or not your business is eligible to deduct any taxes before paying them.