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, use the original accrual date for the year of change and all
future years to determine when you can deduct the tax.
Example.
Your state imposes a tax on personal property used in a trade or
business conducted in the state. This tax is assessed and becomes a
lien as of July 1. The accrual date is July 1 (accrual date). In 2001,
the state changed the assessment and lien dates from July 1, 2002, to
December 31, 2001, for property tax year 2002. Use the original
accrual date to determine when you can deduct the tax.
Uniform capitalization rules.
Uniform capitalization rules apply to certain taxpayers who produce
real property 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 to the extent the deduction reduced
your federal income 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 tax refunds.
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