What Is Taxes and Licenses Expense in Accounting?

The taxes and licenses expense is the line on your business income statement that captures mandatory payments to federal, state, and local governments that you owe simply to operate: employer payroll taxes, property taxes on business assets, franchise and excise taxes, business licenses, and regulatory permits. It does not include income taxes on your profits or sales tax you collect from customers. For 2026, the figures that drive the biggest numbers in this account are a Social Security wage base of $184,500 and a state and local tax deduction cap of $40,400 for most individual filers.¹²

What Goes In the Account

Think of the account in two halves. The tax half covers every tax the business pays in its own name other than income tax. The license half covers recurring government fees for the legal right to operate.

For most employers, the single largest item is payroll tax. You pay a 6.2% Social Security tax and a 1.45% Medicare tax on each employee’s wages, matching the amounts withheld from the paycheck.³ Social Security applies only to the first $184,500 of each employee’s wages in 2026; Medicare has no cap.¹ Federal unemployment tax (FUTA) runs at a standard 6.0% on the first $7,000 of each employee’s wages, usually dropping to an effective 0.6% after the credit for state unemployment contributions.⁴ State unemployment tax (SUTA), which varies by state and by employer experience rating, belongs in the same account.

Property taxes on business real estate and equipment go here, as do use taxes you owe the state on goods you bought without being charged sales tax. Franchise taxes that states impose on net worth or revenue for the privilege of doing business are also part of this account, along with federal excise taxes on fuel, communications, and heavy vehicle use.

On the license side, the common items are:

General city or county business licenses, typically $50 to $500 depending on jurisdiction and industry.
Professional license renewals for fields like real estate, accounting, or contracting.
Health and safety permits, including restaurant health permits and fire inspection fees.
Liquor licenses.
Vehicle registration and tag fees on company vehicles.
State annual report filing fees for LLCs and corporations, which range from zero to several hundred dollars.

What Does Not Belong Here

Four payments look like they should land in this account but shouldn’t. Misclassifying them distorts your financial statements and can create problems in an audit.

Federal and state income taxes. Income tax on your business’s profits sits below operating income on a multi-step income statement, not in operating expenses. It is a function of what you earned, not a cost of operating.

Sales tax collected from customers. That money was never yours. It is a liability you hold until you remit it to the state. Running it through an expense account inflates both revenue and costs.

Employee payroll withholdings. The income tax, Social Security, and Medicare amounts you withhold from employee paychecks are the employees’ money. Your expense is only the employer’s matching share.³

Sales tax built into asset or inventory purchases. Sales tax on a piece of equipment is added to the asset’s cost and recovered through depreciation. Sales tax on inventory becomes part of cost of goods sold.

Expense Now or Spread It Out

Most items in the account are expensed immediately. Annual property taxes, quarterly payroll taxes, and a yearly business license renewal all provide a benefit consumed in the current year and belong on this year’s income statement.

Payments that provide value beyond the current year are different. A three-year operating permit, a five-year broadcast license, or a long-term franchise agreement goes on the balance sheet as an intangible asset and is amortized. Pay $30,000 for a three-year permit and you expense $10,000 a year. Government-granted licenses, permits, and franchises that fall within Section 197 of the tax code are amortized over 15 years regardless of their stated term.⁵ Licenses with a fixed, shorter term that fall outside Section 197 are amortized over the contractual term.

Taxes paid during construction of a long-term asset also get capitalized rather than expensed. Property taxes on land during factory construction become part of the factory’s cost and are recovered through depreciation. Federal tax law requires this treatment for certain indirect costs, including taxes, when they relate to producing property or acquiring inventory.⁶

Deducting What’s in the Account

Nearly every item that correctly belongs in this account is deductible. The foundational rule is that any expense ordinary and necessary for the business qualifies.⁷ The specifics vary by tax type.

Payroll Taxes

The employer’s share of Social Security and Medicare is fully deductible, as are FUTA and SUTA payments.³ At a combined employer rate of 7.65% before unemployment taxes, a business with $1 million in wages carries roughly $76,500 in employer payroll tax alone.

Property Taxes

Real estate and personal property taxes on business assets are deductible in the year paid or accrued, depending on your accounting method.² One trap: special assessments for local improvements like sidewalks or water mains are generally not deductible and add to the property’s basis. Only the portion covering maintenance, repairs, or interest can be deducted.

Sales and Use Taxes

Sales tax on business purchases is deductible, but how depends on what you bought. Sales tax on office supplies or 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 depreciated. 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 embedded in the fuel cost rather than deducted separately, though a credit or refund may be available for fuel used off-highway.

Licenses and Permits

Routine annual renewals (city business licenses, food handler’s permits, professional license renewals, industry certification fees) are fully deductible in the year paid.⁷ Multi-year licenses follow the amortization schedule described above.

State Income Taxes and the 2026 SALT Cap

State and local income tax deductibility depends on your business structure, and the numbers changed for 2026.

C-corporations deduct state income taxes at the entity level as an ordinary business expense. The individual SALT cap does not 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 does not pay state income tax itself; income flows through to owners, who pay state tax individually. For individuals, the combined deduction for state and local income taxes, property taxes, and sales taxes is capped. The 2026 cap is $40,400 for most filing statuses and $20,200 for married-filing-separately.² 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.² Property taxes on a commercial building you own through an LLC are not 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 is not subject to the individual SALT cap.⁸ 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

Any fine or penalty paid to a government for violating a law is non-deductible. It does not matter whether the violation was accidental, occurred during normal operations, or feels like a routine cost of the industry.⁹ Parking tickets, OSHA fines, environmental violation penalties, late tax filing penalties, and settlements of potential penalty liability are all non-deductible, along with any amount paid to reimburse the government for investigation costs.¹⁰

There is a narrow distinction on interest. Interest you owe on unpaid business taxes is generally deductible because it’s treated as additional tax cost. Interest tied specifically to a penalty assessment is non-deductible along with the penalty itself.¹⁰ The practical rule: never route fines through taxes and licenses. Set up a separate non-deductible fines account so they can’t accidentally reduce taxable income.

Self-Employment Tax Sits Elsewhere

Sole proprietors and general partners don’t have an employer splitting payroll taxes with them. Instead, they pay self-employment tax covering both halves: 12.4% Social Security and 2.9% Medicare, totaling 15.3%, with the Social Security portion applying only to net self-employment income up to $184,500 in 2026.¹¹¹

Self-employment tax does not appear in the taxes and licenses expense line on your financial statements. It is calculated on net income after all business expenses and shows up on your personal tax return rather than on your Schedule C. You get to deduct half of it (the employer-equivalent portion) as an adjustment to gross income on your personal return.

2026 Filing Deadlines That Affect Timing

The timing of deductions in this account can hinge on when returns and payments are due:

March 15, 2026: Partnership (Form 1065) and S-corporation (Form 1120-S) returns for calendar-year entities. A six-month extension is available but does not extend the time to pay.
April 15, 2026: C-corporation (Form 1120) returns for calendar-year entities, and individual returns (Form 1040), including Schedule C for sole proprietors.
Estimated tax payments: April 15, June 15, September 15, and January 15, 2027.

¹²

Late-filing penalties can be steep, and because they are penalties, they are not deductible themselves.¹³

Classification Mistakes to Avoid

Getting classification right matters because the wrong account either overstates deductions and invites audit adjustment, or understates them and costs money. The repeat offenders:

Expensing a multi-year license in year one. A $15,000 five-year permit goes on the balance sheet and amortizes, not into the current year’s expense.

Lumping income taxes in. Federal and state income taxes on profits sit below operating income on a classified income statement. Mixing them in inflates operating expenses and understates operating margin.

Recording collected sales tax as an expense. It’s a liability. Only sales or use tax you pay on your own purchases belongs here.

Deducting fines as business expenses. A building-code or environmental fine might feel like a cost of doing business, but the IRS treats it as punitive and non-deductible.

Ignoring the PTE election. In a state that offers it, skipping the election can mean losing part of your state income tax deduction to the SALT cap, even at the 2026 $40,400 level.

1
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
2
Office of the Law Revision Counsel. 26 USC 164 – Taxes
3
Internal Revenue Service. Understanding Employment Taxes
4
Internal Revenue Service. FUTA Credit Reduction
5
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
6
Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
7
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
8
Internal Revenue Service. Notice 2020-75
9
Internal Revenue Service. Publication 529, Miscellaneous Deductions
10
eCFR. 26 CFR 1.162-21 – Denial of Deduction for Certain Fines, Penalties, and Other Amounts
11
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
12
Internal Revenue Service. Publication 509 (2026), Tax Calendars
13
Internal Revenue Service. Failure to File Penalty