What Kinds of Taxes are Deductable from Federal Income Tax?

Various kinds of taxes incurred in operating your business are generally deductible. How and when to
deduct taxes in your business depends on the type of tax.

Sales tax on items purchased for your day-to-day operation is deductible as part of the cost of the
items. It is not deducted separately as taxes. On the other hand, sales tax (or federal luxury tax) on a
business asset—such as a truck bought for your business—must be added to the vehicle’s cost basis.
This means the sales tax is not totally deductible all in the year the truck was purchased.

Sales taxes that you collect as a merchant and pay over to the state are not deductible unless you
included them in your business’s gross receipts. Excise and fuel taxes paid by qualifying businesses
are deductible as separately stated tax expenses. Employment taxes (FICA) paid by your business
are partially deductible. The employer’s one-half share is deductible as a business expense.
Self-employment (SE) tax isn’t a business expense. However, the owner can deduct one-half
of the SE tax on the front page of his or her Form 1040 tax return.

Federal income tax paid on your business’s income is never deductible. State income tax can be deducted on your personal federal tax return as an itemized deduction on Schedule A, not as a business expense.

Real estate tax on business-used property is deductible, along with any special local property
assessments. However, if the assessment is for improvements (for example, a sewer or sidewalk), it
is not immediately deductible; instead, the cost is added to the basis of the property and deducted
(amortized) over a period of years. Real estate tax for nonbusiness property, such as your home, is deductible as an itemized deduction on Schedule A of your personal tax return.

Penalties and fines paid to the IRS and any other governmental agencies are never tax-deductible,
because this is deemed to be against public policy.