Are Property Taxes an Operating Expense?

For businesses, property taxes are considered an operating expense. An operating expense is a cost a business incurs through its normal, day-to-day operations. These expenses are essential for generating revenue and maintaining the business, distinct from costs directly tied to producing goods or services or non-operating activities. Property taxes are recurring charges levied on real estate by local governments, based on the property’s assessed value.

Understanding Operating Expenses and Property Taxes

Operating expenses represent the ongoing costs necessary to keep a business running. These costs are incurred in the regular course of business activities and are fundamental to a company’s ability to generate income. Common examples include rent for office space, utility bills, employee salaries, and marketing expenses, all of which are vital for operational continuity.

Property taxes, conversely, are taxes imposed by local government entities on real estate, encompassing both land and any structures built upon it. These taxes are calculated based on the property’s assessed value and are a recurring, mandatory obligation for property owners.

Property Taxes as an Operating Expense

Property taxes meet the criteria of an operating expense for businesses because they are direct costs associated with owning and utilizing property for business operations. These taxes are a regular and necessary expenditure for any business that owns its physical location. They ensure the ongoing availability and legality of the business premises.

These taxes are not directly tied to the production of specific goods or services, differentiating them from costs of goods sold. Instead, property taxes are part of the overhead required to maintain a functional business environment, much like rent or utilities. Their recurring nature and necessity for maintaining a business’s physical presence firmly place them within the operating expense category. Businesses must pay these taxes regardless of their sales volume, making them a fixed cost of operation.

Reporting and Tax Considerations

When it comes to financial reporting, businesses record property taxes on their income statement, also known as the profit and loss (P&L) statement. They appear within the operating expenses section, directly reducing the business’s operating income. This classification reflects their role as a regular cost of doing business, impacting the company’s profitability.

For tax purposes, property taxes paid on business property are generally deductible as ordinary and necessary business expenses. This deduction reduces the business’s overall taxable income, thereby lowering its federal income tax liability. The Internal Revenue Service (IRS) allows businesses to deduct these expenses as long as the business operates with the intent to earn a profit.

In contrast, property taxes paid by individuals on their personal residences are treated differently. While individuals may deduct state and local property taxes, this deduction is typically an itemized deduction on their federal income tax return. This deduction is subject to limitations, such as the State and Local Tax (SALT) cap.