Can You Deduct Excise Tax on Your Federal Tax Return

Excise taxes can sometimes lead to confusion among organizations due to being reported separately from income taxes. Organizations filing the IRS Form 720, Quarterly Federal Excise Tax Return, might be curious about whether they can deduct the excise taxes paid from their federal income tax return.

This will depend on the reason you have paid the excise tax and its relationship with your business.

It is important to note that excise taxes paid for personal use are not deductible. In the case where an excise tax is incurred in relation to the conduct of trade or business activities, the excise tax may be treated as a deductible business expense.

This write-up gives information about deductible excise taxes, non-deductible excise taxes, and what businesses need to do.

Yes, in certain situations, Form 720 excise taxes may be deductible on a federal income tax return. However, they are not automatically deductible.

The deductibility depends upon whether the expenditure qualifies as an ordinary and necessary business expense according to IRC §162.
A Form 720 excise tax may be deductible when:
1)It is paid as part of business operations.
2)It is clearly associated with continuing the operation of a business or trade.

3)Records facilitate the payment and business activity.
It generally cannot be deducted when:
1)Associated with personal activity or transactions.

2)It is not associated with the business.
3)The taxpayer is seeking a refund instead of claiming an expense deduction.

For example, a business may first report and pay an applicable excise tax through Form 720 and later determine whether that payment qualifies as a deductible business expense on its federal income tax return.

There are three different situations businesses should understand when dealing with excise taxes paid through Form 720.
1. Deducting Excise Tax as a Business Expense on a Federal Tax Return
If the excise tax paid using Form 720 is directly associated with the business activities of the company, it is eligible for deduction as an expense. It does not affect the liability associated with the Form 720 tax but affects the business's income tax liability.
The tax treatment depends on the type of taxpayer:

2. Claiming a Refund Instead of Taking a Deduction
A deduction and a refund are two different processes. If a business paid more excise tax than required, paid the wrong amount, or qualifies for a specific refund provision, the business may need to file Form 8849, Claim for Refund of Excise Taxes. 
Examples:
->The business paid an excise tax amount that was not actually due.
->The business made an overpayment.
->The business qualifies for a specific excise tax refund claim.

In this situation, the goal is to recover the excise tax paid, not reduce taxable income.
Form 8849 = Request money back from the IRS
Federal income tax deduction = Reduce taxable income

3. Correcting an Error on the Original Form 720 Filing
Where there is no matter of deduction and only the problem of the mistake on the original 720 form filing, the taxpayer might have to fix the 720 Form return.
Examples:
->Incorrect tax amount reported.
->Incorrect taxable amount entered.
->Wrong information reported on the filed Form 720.

An amended Form 720 corrects the excise tax filing itself.

This is different from:
->Filing Form 8849 for a refund claim.
->Claiming a business expense deduction on an income tax return.

Scenario 1: Business Excise Tax Paid as an Operating Expense
Situation:
A company incurs an excise tax that is required to be reported using form 720 in the course of doing business.
Tax Treatment:
This tax could possibly qualify for deduction in the business expense category, if it fulfills the ordinary and necessary criteria per IRC §162.

The effect is that the deduction will lower the company’s taxable income but not the excise tax on form 720.
Reported On:
Form 1040 Schedule C (Sole Proprietors)
Form 1120 (Corporations)
Form 1120-S (S Corporations)
Form 1065 (Partnerships)

Scenario 2: Form 720 Excise Tax Deducted as a Business Expense
Situation:
A company makes a payment of $25,000 towards excise tax under form 720 in respect of its business operations.
Tax Treatment:
Since the payment is related to business, it may be considered an allowable deduction depending on how it meets IRS requirements.
Example:

Reported On:
The deduction is claimed on the applicable federal income tax return, such as Form 1120, Form 1065, or Form 1040 Schedule C.

Scenario 3: Excise Tax Paid for Personal Use
Situation:
A person pays an excise tax that is not related to any business transactions.
Tax Treatment:
It can rarely be deductible since personal expenses are not treated as ordinary and necessary business expenses.
Reported On:
No business deduction is claimed for personal expenses.

Businesses claiming deductions should maintain documentation supporting:
1)The form 720 submission that evidences payment of the excise tax.

2)Evidence that confirms the payment.

3)The purpose of the business that relates to the cost.

4)Accounting records showing how the expense was treated.

Proper recordkeeping helps demonstrate that the expense meets IRS requirements for business deductions.

You can visit the official IRS pages which explains different scenarios for your federal excise tax deductions.

Conclusion

Not all excise taxes that are reported on Form 720 can be automatically deducted from income tax return. It all depends on whether the payment was made as part of business activity that is allowed according to IRS rules for deducting business expenses.

If it is a legitimate business expense and the excise tax was paid correctly, then it may become eligible for deductions. In case the tax was incorrectly paid, then businesses can look at ways of receiving refunds instead of deductions. Using Simple720, businesses can make the reporting of their federal excise tax accurately.

File your Federal Excise Tax Online with Simple720!