What expense category is Property Taxes?

For any business that owns its own real estate—be it an office, a warehouse, or a retail store—paying annual property taxes to state and local governments is a significant and unavoidable cost. The good news for business owners and their accountants is that these taxes are a fully deductible business expense.

However, the IRS has specific rules that distinguish deductible property taxes from other non-deductible assessments. Understanding this distinction is crucial for accurate tax filing and compliance. This guide will clarify how to categorize property taxes, the important rules you must follow, and how to track these recurring expenses.

Property Taxes (Business Real Estate) Category

The real estate taxes you pay on your business property are an ordinary and necessary business expense. These costs are reported under the specific category of Taxes and Licenses.

IRS Publication 334 and Publication 535 confirm that you can deduct various federal, state, and local taxes that are directly attributable to your trade or business.

Important Considerations While Classifying Property Taxes

The most critical factor in deducting these costs is understanding what qualifies as a tax versus a non-deductible assessment.

Deductible Taxes vs. Non-Deductible Assessments

Deductible Property Taxes

According to Publication 535, deductible real estate taxes are those levied by a state or local government for the general public welfare. They must be based on the assessed value of your property and charged uniformly.

Non-Deductible Assessments for Local Benefits

You generally cannot deduct taxes or assessments charged for local benefits that tend to increase the value of your property. Publication 535 gives examples such as assessments for streets, sidewalks, water mains, and sewer lines. These costs must be capitalized and added to the basis of your property.

Exception for Maintenance: If a portion of an assessment is for maintenance, repairs, or interest charges related to those local benefits, that portion is deductible as a tax.

Taxes on Leased Property

If your lease agreement requires you, the lessee, to pay the real estate taxes on the property you rent, you can deduct these payments as additional Rent Expense, not as a tax.

Buying or Selling Property

When business real estate is bought or sold during the year, Publication 535 requires that the property tax deduction be allocated between the buyer and the seller according to the number of days each party owned the property during the real property tax year.

Tax Implications and Recordkeeping

To deduct your business property taxes, you must report them correctly and maintain proper documentation.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), deductible real estate taxes on business property are reported on Part II, Line 23, Taxes and licenses.

What Records to Keep

You must have documentary evidence to substantiate the amount and payment of your property taxes. Your records should include:

• The property tax bill from your state or local government.
• Proof of payment, such as a canceled check, a receipt from the tax authority, or your year-end mortgage statement if the taxes are paid through an escrow account.

How Fyle Can Automate Tracking for Property Taxes

Fyle helps you manage and document your property tax payments, ensuring you have a complete and compliant record for tax time.

• Centralize Tax Bills: Forward property tax bills from your email to be forwarded directly to Fyle for a centralized, easily accessible digital record.
• Track Payments: Capture every tax payment, whether made by check or automatically from a bank account, to create a clear payment history.
• Create a Clear Audit Trail: Fyle keeps the tax bill and the proof of payment together in one organized expense record.
• Automate Your Accounting: Sync the categorized tax expense directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.