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1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problemsFor a U.S. sole proprietor filing Schedule C, certain taxes tied directly to operating the business may be deductible—but federal income tax is not a Schedule C expense. The key test is whether the cost is an ordinary and necessary business expense, and whether it belongs on Schedule C, elsewhere on the return, or in the basis of property. This overview focuses on federal rules reflected in the IRS’s 2025 guidance; state and local rules and entity-specific returns can differ.
Start with the ordinary-and-necessary test
The IRS says, “To be deductible, a business expense must be both ordinary and necessary.” An ordinary expense is common and accepted in the trade or business; a necessary expense is helpful and appropriate, though it need not be indispensable. The tax must have a genuine business connection. If a cost covers both business and personal use, generally only the business share qualifies. See the IRS Publication 334 (2025), Tax Guide for Small Business.
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Which business taxes may be deductible?
| Payment | General federal treatment for a Schedule C business |
|---|---|
| Employer Social Security and Medicare taxes | The employer-paid matching amounts may qualify as a business expense, subject to the return instructions and any applicable credits. Employee withholding is not the employer’s own tax cost. |
| Federal unemployment tax (FUTA) and certain state funds | FUTA and qualifying state unemployment, paid family and medical leave, or disability fund payments treated as taxes may qualify. Classification and current instructions matter. |
| Business real estate or personal property taxes | Taxes imposed on property used in the business may qualify. Allocate the business share if the property has mixed use. |
| State or local gross-receipts taxes | Qualifying taxes directly attributable to the business may be deductible. |
| Excise taxes | An excise tax may qualify when it is an ordinary and necessary cost of carrying on the business; not every excise tax automatically qualifies. |
| Annual business licenses and regulatory fees | Annual trade or business licenses and regulatory fees can generally be reported as taxes and licenses. Some licenses may instead need to be amortized. |
| Federal income tax | Not deductible as a Schedule C business expense. |
| Self-employment tax | Not deducted on Schedule C. Generally, one-half is claimed separately on Schedule 1. |
The IRS lists qualifying categories on the 2025 Schedule C instructions, line 23 (Taxes and licenses). Follow the instructions for the tax year and return you file.
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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallHow sales tax is treated depends on who pays it
Sales tax you pay on a business purchase
Tax paid when buying a business service or property generally follows the treatment of that purchase. It may be included with a deductible expense, or, for depreciable property, added to the property’s basis rather than deducted immediately as a tax expense.
Sales tax you collect from customers
Sales tax collected from a buyer and remitted to a government is not your deductible business expense. The 2025 Schedule C instructions make an exception when the government allows the seller to retain collected tax: the retained amount is income.
Business property taxes, mixed use, and excluded charges
A tax on business property may qualify, but the property’s use and the type of charge matter. Taxes on a home or other personal-use property, taxes unrelated to the business, and assessments imposed to pay for improvements are not Schedule C business tax expenses under the cited instructions. When an asset serves both personal and business purposes, allocate qualifying costs to business use rather than deducting the full amount.
IRS vehicle example: allocate by business use
In an example in Publication 334 (2025), a taxpayer drives 7,000 business miles out of 10,000 total miles and pays $25 for annual state license tags, $20 for a city registration sticker, and $235 in city personal property tax. The business-use share is 70%, so the example allocates $196 of the $280 in charges to business use when actual car expenses are claimed. This is an illustration, not a universal formula for every vehicle or taxpayer.
The IRS also says that annual vehicle excise or personal property taxes can qualify, while a prepaid multiyear tax is deductible only for the year to which it applies. Its guidance describes a 12-month rule for recurring taxes and fees; check the applicable accounting and return rules for your circumstances. See the IRS vehicle-expense FAQ.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Where to report the deduction—and why the return matters
For a sole proprietor, the 2025 Schedule C instructions identify line 23 as “Taxes and licenses.” Listed items include certain seller sales taxes, business real estate and personal property taxes, annual licenses and regulatory fees, employer Social Security and Medicare taxes, FUTA, qualifying state funds, and federal highway use tax. Sales tax on property bought for business use generally follows the property’s cost treatment instead of being deducted on that line.
Do not put federal income tax or self-employment tax on Schedule C. The deductible half of self-employment tax is a separate deduction reported on Schedule 1, rather than a Schedule C tax expense.
Schedule C guidance does not automatically apply to other entities or jurisdictions. For example, the 2025 Form 1120-S instructions separately address taxes and licenses paid or incurred in an S corporation’s trade or business, unless reflected elsewhere. A tax tied to acquiring or disposing of property may instead affect basis or amount realized. Partnerships, C corporations, and state or local returns have their own applicable instructions.
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Keep records showing what tax or fee you paid, when it applied, the property or activity it related to, and why it was a business cost. For mixed-use property or vehicles, retain records supporting the business-use allocation. The IRS identifies Publication 334 as its small-business tax guide; use the current instructions for the return and tax year you file. The IRS index also lists Publication 535, Business Expenses.
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