Business Licenses and Permits as Deductible Expenses

Licenses and Permits Paid by Small Businesses are Tax-Deductible Expenses

Business people working late at computers in office
Hero Images/Getty Images

Small businesses have to have a number of business licenses and permits in order to operate legally and most are tax-deductible expenses. In the simplest case, a business may just have to have a basic license to operate. In the most complicated case, a business may have to have some sort of complex permit, such as an environmental permit, to operate.

The type of regulations, licenses, and permits vary widely based on federal, state, local, and industry requirements and laws.

Business licenses are an inevitable part of starting most businesses. Whether you are starting a business as a restaurant, a daycare provider, a bill collector, or a butcher, you will need to obtain the required business licensing to operate your business legally. A business license indicates to clientele that the business owner has legally registered the business. What is more, a license indicates that the business owner recognizes all local, state, and federal regulation for the business and is willing to comply with the laws.

Federal

All businesses must apply for and acquire an Employer Identification Number (EIN), which is the business version of a Social Security Number.

If the business is highly regulated by the federal government, e.g., alcohol, firearms, investment counseling, broadcasting, etc., a federal business license or permit will be required.

State

The majority of states require some kind of business licensing when a new business is registered, whether the business is operated out of the home, on the internet, or out of a commercial location.

 Most business owners should expect licensing to be a prerequisite for operating the business.

As with federal requirements, business that sell products or services regulated by the laws of that specific state will require a state license or permit. This includes hair salons and cosmetology centers, private investigators, security guards, account firms, real estate agents, medical providers, building contractors and auctioneers.

Additionally, a business that is required to collect sales tax from customers may require a sates tax license. 

Local

It may be that your municipality also requires a license or permit for your business. This may often be a required precursor to any state registration. Local business licenses, as well as local business permits, are usually simple to obtain and low in cost, but they are required for businesses to operate legally.

How to Find The Licensing Requirements for Your Business

Go to Business.gov's site and based on your zip code, you can find the licenses and permits you need for your business. Then, the next best thing to do is consult with a tax accountant to be sure you take advantage of every deduction due to you.

Tax Deductibility

It is likely that the cost of obtaining and renewing the required licenses and permits for your business at all levels (federal, state and local) is tax deductible, however, you should check with your tax and accounting professionals.