What Is Taxes and Licenses Expense in Accounting?

The taxes and licenses expense is the line on your business income statement that captures the mandatory payments you make to federal, state, and local governments simply to operate. It covers payroll taxes, property taxes, franchise taxes, business licenses, regulatory permits, and similar charges the business owes in its own name. It does not cover income taxes on your profits, and it does not cover sales tax you collect from customers. Those sit elsewhere in your books for good reason.

What Belongs in the Account

Think of the account in two halves. One half is taxes the business itself owes that aren’t income taxes. The other half is recurring government fees you pay for the legal right to do business.

The Tax Side

For most employers, the largest item here is payroll tax. Every employer pays a 6.2% Social Security tax and a 1.45% Medicare tax on each employee’s wages, matching the amounts withheld from the paycheck.¹ For 2026, Social Security tax applies only to the first $184,500 of each employee’s wages; Medicare has no cap.² Federal unemployment tax (FUTA) runs at a standard 6.0% on the first $7,000 of each employee’s wages, though a credit for state unemployment contributions usually brings the effective rate to 0.6%.³ State unemployment taxes (SUTA) vary by state and by employer experience rating, and they belong here too.

Property taxes are the other big category. Annual assessments on business real estate and equipment — a warehouse, an office building, heavy machinery — go into this account. Use taxes belong here as well: when you buy from a vendor that didn’t charge sales tax, you owe the equivalent use tax directly to the state. Franchise taxes, which many states impose on businesses based on net worth or revenue for the privilege of operating in the state, sit alongside them. So do federal excise taxes on fuel, communications services, and heavy vehicle use.

The License Side

Common items on the license side include:

General business licenses: annual or biennial operating permits issued by your city or county, typically running between $50 and $500 depending on jurisdiction and industry.
Professional license renewals such as real estate, accounting, or contractor credentials.
Health and safety permits, including restaurant health permits and fire inspection fees.
Liquor licenses.
Vehicle registrations for company-owned cars, trucks, or fleets.
Annual report fees that most LLCs and corporations must file with the state to stay in good standing, ranging from $0 to several hundred dollars.

What Does Not Belong

Several tax-related payments look like they should land here but don’t. Getting the classification wrong distorts your financial statements and creates problems in an audit.

Federal and state income taxes on business profits go lower on the income statement, below operating income. They’re a function of what you earned, not a cost of operating. On a multi-step income statement, taxes and licenses sits above operating income; income taxes sit below it.

Sales tax collected from customers was never your money. It’s a liability you hold until you remit it to the state. Recording it as an expense would inflate both revenue and costs.

Employee payroll withholdings are the employees’ money, not your expense. Your expense is only the employer’s matching share.¹

Taxes built into asset purchases follow the asset. Sales tax paid when buying a piece of equipment is added to the cost of the asset rather than expensed separately. Sales tax on inventory gets folded into cost of goods sold.

Expensing Versus Capitalizing

Most taxes and license fees are expensed immediately, reducing income in the year paid. Annual property taxes, quarterly payroll taxes, and a yearly business license renewal all deliver a benefit consumed within the current year and belong on this year’s income statement.

The exception is any payment that provides value beyond the current year. A three-year operating permit, a five-year broadcast license, or a long-term franchise agreement cannot be expensed all at once. You record the payment as an asset on the balance sheet and amortize it, spreading the cost evenly over the license’s life. Pay $30,000 for a three-year permit and you expense $10,000 per year.

Taxes paid during construction of a long-term asset also get capitalized. Property taxes on land while a factory is being built become part of the factory’s cost and are recovered through depreciation over the asset’s useful life. Federal tax law requires this treatment for certain indirect costs, including taxes, when they relate to producing property or acquiring inventory.⁴

Government-granted licenses, permits, and franchises are classified as intangible assets under Section 197 and are amortized over 15 years if they fall within that section’s scope.⁵ For licenses with a fixed, shorter term that don’t qualify as Section 197 intangibles, you amortize over the contractual term instead.

How These Items Deduct

Nearly every tax that belongs in this account is deductible. The baseline rule is that you can deduct any expense that is ordinary and necessary for your business.⁶ The specifics vary by tax type.

Payroll Taxes

The employer’s share of Social Security and Medicare is fully deductible, and so are FUTA and SUTA payments.¹ For a business with substantial payroll, this is usually the largest single item in the account.

Property Taxes

Real estate taxes and personal property taxes on business assets are deductible in the year paid or accrued, depending on your accounting method.⁷ One detail that trips people up: special assessments for local improvements like sidewalks or water mains generally aren’t deductible. They add to the property’s basis. Only the portion covering maintenance, repairs, or interest is deductible.

Sales and Use Taxes

Sales tax you pay on business purchases is deductible, but how depends on what you bought. Sales tax on office supplies or advertising services gets expensed with the underlying purchase. Sales tax on inventory goes into cost of goods sold. Sales tax on a capital asset gets added to the asset’s cost and recovered through depreciation. Use taxes follow the same rules.

Excise Taxes

Federal excise taxes on communications, heavy vehicle use, and similar items are deductible as ordinary business expenses. Fuel taxes are typically included in the cost of the fuel itself rather than deducted separately, though you may qualify for a credit or refund on fuel used for certain off-highway purposes.

Vehicle Registrations

Registration fees for business vehicles are deductible. If your state charges registration based on the vehicle’s value, that portion qualifies as a deductible personal property tax. A flat registration fee is still deductible, just as a regular business expense rather than a property tax.

Foreign Taxes

Businesses that pay income taxes to foreign governments have a choice: claim a foreign tax credit that reduces U.S. tax dollar-for-dollar, or deduct the foreign taxes as a business expense. The credit is almost always the better deal because a credit directly offsets tax owed, while a deduction only reduces the income that gets taxed.⁸ You must pick one approach for all your foreign taxes in a given year.

State Income Taxes and the 2026 SALT Cap

State and local income taxes deserve a separate look because deductibility depends on your business structure.

C-corporations deduct state income taxes at the entity level as an ordinary business expense. The individual SALT cap doesn’t apply, so a C-corp deducts whatever state income tax it owes without limitation.

Pass-through entities work differently. An S-corporation or partnership generally doesn’t pay state income tax itself; the income flows through to owners’ personal returns, where they pay state tax individually. For individuals, the deduction for state and local taxes combined is capped. For the 2026 tax year, that cap is $40,400 for most filing statuses and $20,200 for married-filing-separately returns.⁷ The cap phases down for taxpayers with modified adjusted gross income above $500,500 in 2026, increases by 1% annually through 2029, and reverts to $10,000 in 2030.

An important carve-out: the SALT cap applies only to individual itemized deductions. Taxes paid in carrying on a trade or business are explicitly exempt from the cap under federal law.⁷ Property taxes on a commercial building you own through an LLC, for instance, aren’t subject to the cap because they’re business expenses. The cap bites hardest on state income taxes flowing through to an owner’s personal return.

To address this, most states now offer a pass-through entity (PTE) tax election. If your S-corp or partnership elects to pay state income tax at the entity level, that payment is deductible as an ordinary business expense on the entity’s return and isn’t subject to the individual SALT cap.⁹ Even with the higher 2026 cap, the PTE election remains valuable for high-income owners in high-tax states whose combined state and local taxes would otherwise exceed $40,400.

Fines and Penalties Are Not Deductible

This is where business owners consistently get it wrong. Any fine or penalty you pay to a government for violating a law is non-deductible. It doesn’t matter whether the violation was accidental, whether it happened during normal operations, or whether the fine feels like a routine cost of the industry.¹⁰

Parking tickets, OSHA fines, environmental violation penalties, late tax filing penalties, and settlements of potential penalty liability are all non-deductible. So is any amount you pay to reimburse the government for investigation costs.¹¹

There is a narrow distinction on interest. Interest owed on unpaid business taxes is generally deductible because it’s treated as additional tax cost, not a penalty. Interest tied specifically to a penalty assessment is non-deductible along with the penalty itself.¹¹ The practical lesson: never route fines through the taxes and licenses expense account. Create a separate non-deductible fines account so they don’t accidentally reduce taxable income.

Classification Mistakes to Avoid

Getting these classifications right matters because the wrong account either overstates deductions (inviting an audit adjustment) or understates them (costing you money). A few patterns show up repeatedly.

Expensing a multi-year license in year one. Paying $15,000 for a five-year government permit doesn’t give you $15,000 of taxes and licenses expense this year. The payment goes on the balance sheet as an intangible asset and is amortized over the permit’s life.

Lumping income taxes into the account. Federal and state income taxes on business profits appear below operating income on a classified income statement. Mixing them into taxes and licenses inflates operating expenses and understates operating margin.

Recording collected sales tax as an expense. Sales tax collected from customers is a liability. Only sales or use tax you pay on your own purchases belongs here.

Deducting fines as business expenses. A building code violation or environmental penalty might feel like a cost of doing business. The IRS disagrees, and the adjustment on audit is straightforward.

Ignoring the PTE election. Owners of S-corps or partnerships in states offering a pass-through entity tax election can lose part of their state income tax deduction to the SALT cap by not electing. Even at the 2026 cap of $40,400, high-income owners in high-tax states still hit the ceiling.

1
Internal Revenue Service. Understanding Employment Taxes
2
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
3
Internal Revenue Service. FUTA Credit Reduction
4
Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
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Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
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Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
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Office of the Law Revision Counsel. 26 USC 164 – Taxes
8
Internal Revenue Service. Foreign Tax Credit – Choosing to Take Credit or Deduction
9
Internal Revenue Service. Notice 2020-75
10
Internal Revenue Service. Publication 529, Miscellaneous Deductions
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eCFR. 26 CFR 1.162-21 – Denial of Deduction for Certain Fines, Penalties, and Other Amounts