There are several types of taxes that corporations pay to the states in which they operate, and all of them are deductible when calculating federal income tax. However, only state and local taxes that are attributable to the conduct of the corporation’s business constitute deductible expenses. Payments made by a corporation on behalf of others are not business expenses and therefore not deductible for federal income tax.

State Income Tax

A corporation can deduct income taxes imposed by state and local governments as business expenses for federal income tax purposes. This assures that corporate income is not taxed twice with a combination of state and federal levies. In some states, corporations pay franchise tax, which is also based upon corporate income. Franchise tax is also a business expense deductible from federal income tax.

Employment Taxes

If a corporation has employees, it pays certain employment taxes with corporate funds. This does not include amounts retained from employee wages. A corporation may only deduct employment taxes paid with corporation money. As an employer, the corporation deducts from its federal income tax return all payments to a state unemployment compensation fund or to a state disability benefit fund.

Real Estate and Property Taxes

Real estate taxes paid to any state or local government are deductible expenses for federal income tax reporting. However, there is no tax-deductible expense for real estate taxes to create improvements for the general public welfare, such as providing sidewalks. Deductible real estate taxes must be levied by a taxing authority charging a uniform rate on assessed values. A corporation can also deduct similar taxes imposed by a state or local government on personal property used in the corporation’s business activity.

Sales Tax

For purchases by a corporation of goods or services that are deductible business expenses, the sales tax component of cost is also deductible. However, sales tax is included in the cost of capital goods that must be depreciated over several years, according to federal income tax rules. The sales tax paid on these purchases of fixed assets is not segregated as an immediately deductible business expense. Sales tax collected from customers is not a business expense and is therefore not a deduction on the corporation’s federal income tax return.