Delinquent business tax payments and their deductibility on a current-year Form 1120S can be analyzed through the lens of § 162 of the Internal Revenue Code, which outlines the general rules for business deductions, and specific guidance provided for Form 1120S.
- General Deductibility of Business Expenses: § 162(a) allows for the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. This broad provision establishes the baseline for what types of expenses can be deducted by a business.
- Exceptions to Deductibility: § 162(f) introduces exceptions to the general rule of deductibility, particularly concerning fines, penalties, and other amounts paid to government entities. § 162(f)(1) explicitly states that no deduction is allowed for any amount paid or incurred to a government or governmental entity in relation to the violation of any law or the investigation into the potential violation of any law. This would include delinquent tax payments, as they are penalties for failing to comply with tax laws in a timely manner.
- Exceptions to the Exceptions: § 162(f) also outlines specific exceptions where certain payments to government entities may still be deductible. These include amounts constituting restitution or paid to come into compliance with the law (§ 162(f)(2)), amounts paid as a result of certain court orders where no government entity is a party (§ 162(f)(3)), and explicitly, taxes due (§ 162(f)(4)). However, delinquent tax payments, being penalties for late payment rather than the taxes themselves, do not fall neatly under these exceptions.
- Form 1120S Specific Guidance: The Instructions for Form 1120-S do not provide specific guidance on the deductibility of delinquent business tax payments. They focus on the reporting requirements for S corporations and the allocation of income, deductions, credits, etc., to shareholders through Schedule K and Schedule K-1. There is no direct mention of delinquent tax payments or their treatment.
Given the information provided, delinquent business tax payments, being penalties for the late payment of taxes, do not qualify as deductible business expenses under § 162(a) due to the explicit prohibition in § 162(f)(1) against deductions for fines or penalties paid to a government for the violation of any law, which would include tax laws. The exceptions provided in § 162(f) do not apply to these types of payments, as they do not constitute restitution, compliance costs, or taxes due per se but are penalties for failing to pay taxes on time.
Therefore, based on the information provided, delinquent business tax payments are not deductible on a current-year Form 1120S.
Sources:
§ 162. Trade or business expenses
Instructions for Form 1120 (2023)
Instructions for Form 1120-C (2023)
Instructions for Form 1120-S (2023)
Rev. Rul. 58-112
Rev. Rul. 81-151
