Generally, you can only deduct taxes in the year you pay them. This
applies whether you use the cash method or an accrual method of
accounting.
Under an accrual method, you can deduct a tax before you pay it if
you meet the exception for recurring items discussed under
Economic Performance in Publication 538.
You can also
choose to ratably accrue real estate taxes as discussed later under
Real Estate Taxes.
Limit on accrual of taxes.
A taxing jurisdiction can require the use of a date for accruing
taxes that is earlier than the date it originally required. However,
if you use an accrual method and can deduct the tax before you pay it,
the accrual date for federal income tax purposes is the original
accrual date. Use the original accrual date for all future years as
well.
Example.
Your state imposes a tax on intangible and tangible personal
property used in a trade or business conducted in the state. This tax
is assessed and becomes a lien as of July 1. In 2000, the state, by
legislative action, changes the assessment and lien dates from July 1,
2001, to December 31, 2000, for property tax year 2001. Because
December 31 is earlier than the original accrual date, the tax for
federal income tax purposes accrues on July 1, 2001.
Uniform capitalization rules.
Uniform capitalization rules apply to certain taxpayers who produce
real or tangible personal property for use in a trade or business or
for sale to customers. They also apply to taxpayers who acquire
property for resale. Under these rules, you may have to either include
in inventory costs or capitalize certain expenses related to the
property, such as taxes. For more information, see Publication 551.
Carrying charges.
Carrying charges include taxes you pay to carry or develop real
estate or to carry, transport, or install personal property. You can
choose to capitalize carrying charges not subject to the uniform
capitalization rules if they are otherwise deductible. For more
information, see chapter 8.
Refunds of taxes.
If you receive a refund for any taxes you deducted in an earlier
year, include the refund in income only to the extent the deduction
reduced your tax in the earlier year. For more information, see
Recovery of amount deducted in chapter 1.
You must include in income any interest you receive on state or
local tax refunds.
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