Business taxpayer: Payment under state or local tax credit programs may be deductible as business expenses

Business taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses, the Internal Revenue Service said today.

Responding to taxpayer inquiries, the IRS clarified that this general deductibility rule is unaffected by the recent notice of proposed rulemaking concerning the availability of a charitable contribution deduction for contributions pursuant to such programs. The business expense deduction is available to any business taxpayer, regardless of whether it is doing business as a sole proprietor, partnership, or corporation, as long as the payment qualifies as an ordinary and necessary business expense. Therefore, businesses generally can still deduct business-related payments in full as a business expense on their federal income tax return.

What Are State or Local Tax Credit Programs?

State and local tax credit programs are incentives provided by governments to encourage businesses to invest in specific areas, such as job creation, environmental sustainability, or community development. These programs offer businesses a way to reduce their tax liabilities by providing credits against taxes owed in return for certain investments or actions.



For example, if a business makes a charitable donation, invests in local infrastructure, or hires a certain number of employees in a specific region, it may qualify for these credits. While the credits directly reduce a business's tax liability, the question remains: can these payments also be deducted as business expenses?

1. The Payment Must Be for a Business Purpose

To qualify for a deduction, the payment should be related to the business's regular operations. If the payment is made as part of an investment in business activities, it can often be considered a deductible business expense.

For example, if a business receives a state tax credit for hiring new employees, the cost of that incentive may be considered a business expense if it directly relates to the business’s hiring strategy.

2. Not a Capital Expenditure

Some tax credits or payments are considered capital expenditures, meaning they involve investing in property or equipment for the business. Capital expenditures are not deductible in the same way as regular business expenses. Instead, they may need to be depreciated over time.

If the payment is tied to improving or purchasing long-term assets for the business, it may not be immediately deductible. However, this may depend on the specific terms of the credit program.

3. Consult with a Tax Professional

The key to taking full advantage of tax credit programs and deductions is to consult with a tax professional. These experts can help determine whether a particular payment can be deducted and how it will impact your tax filings.

Can Payments Under Tax Credit Programs Be Deducted?

Updates on the implementation of the Tax Cuts and Jobs Act (TCJA) can be found on the Tax Reform page of IRS.gov.

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