Can You Deduct Business License Fees?
In general, the Internal Revenue Code in 2010 allows U.S. business taxpayers to claim a deduction from gross income for all business licenses and regulatory fees required by federal, state or local laws and regulations directly related to the his trade or business activities. The Internal Revenue Code also requires some business licenses and regulatory fees to amortized.
Other People Are Reading
-
General
-
The Internal Revenue Service (IRS) will generally allow a business taxpayer to deduct any license or regulatory fee if the taxpayer can show the license or fee is either necessary or directly related to the trade or business. Business taxpayers that report on a cash basis may typically deduct the full amount of most business licenses and regulatory fees in the year the business pays for the license.
Amortization
-
Business taxpayers reporting on an accrual basis may need to amortize the cost of the life of the license. Amortization involves spreading the deduction over the life of the license or fee. For example, a calendar year taxpayer who purchases a license for the period from July 1 to June 30 may generally deduct one-half of the license cost for the period July 1 to December 31 and the second half of the license in the next tax year. If the license is obtained as part of business start-up costs prior to the beginning of a businesses operations, both cash and accrual taxpayers may be required to amortize the license in accordance with IRS regulations for organizational costs.
-
Basis
-
Deductibility of business licenses and regulatory fees is typically restricted to a taxpayer's basis in the business. Basis is a measure of the taxpayer's investment at risk. Basis can be established by contributing cash or property to a business, loaning money, recognizing income or by personally guaranteeing business obligations. Taxpayers with insufficient basis in the business may claim the deduction for licenses and regulatory fees on the business' income tax return but they may not claim the deduction on their personal returns until they have established sufficient basis.
Employees
-
Non-business owner employees may generally deduct licenses and fees that they incur related to their functions as employees and for which they are not reimbursed by their employers. These business expenses are deducted as a miscellaneous deduction on Schedule A, Itemized Deductions, of their Form 1040, U.S. Individual Income Tax Return. Taxpayers may only claim miscellaneous deductions to the extent that the total of all miscellaneous deductions exceed 2 percent of the taxpayer's adjusted gross income.
-
