Business Licenses and Tax Deductions: What You Need To Know

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Most small businesses are required to obtain a number of business licenses and permits in order to operate legally, but they're tax-deductible expenses in many cases. Licenses are an inevitable part of starting most businesses, so they're considered to be a business cost. You must obtain the required business licensing to operate your business legally, whether you're opening a restaurant or running a daycare.

What Is a Business License?

A business may need just a basic license to operate, but some enterprises require a more complex permit to operate, such as an environmental permit. The types of regulations, licenses, and permits can vary widely based on federal, state, local, and industry requirements and laws.

A business license also indicates to your clientele that you've legally registered your business. It's a statement that you recognize all local, state, and federal regulations for your business and that you're willing and able to comply with the laws.

Key Takeaways

  • Types of required business licenses can vary depending on the nature of your business and by government level, such as federal, state, or local.
  • At the minimum, your business will need an Employer Identification Number (EIN) at the federal level.
  • You also need federal permits to conduct any type of business that is regulated by the government, such as if you deal in firearms.
  • Some states require special certification to collect sales tax.
  • The expense of licensing can be tax-deductible, but there are limitations.

Federal Licensing Requirements

All businesses must apply for and acquire a federal Employer Identification Number (EIN) to operate in the U.S. This is the business version of a Social Security number for individuals. You can apply for an EIN online at the IRS website. You or the individual who's submitting the application for an EIN must personally have a Social Security number or other taxpayer identification number.

A federal business license or permit will also be required if your type of business is highly regulated by the federal government. This would be the case if you're dealing in alcohol, firearms, investment counseling, or broadcasting. The issuing agency will vary depending on the nature of your business. You would apply to the Alcohol and Tobacco Trade and Tax Bureau if yours is a retail establishment that sells alcoholic beverages.


The U.S. Small Business Administration publishes a full list of appropriate agencies on its website depending on your business, along with links to take you to their sites.

State Licensing Requirements

The majority of states also require some type of business licensing when a new business is registered, whether it's operated out of the home, on the internet, or out of a commercial location. Most business owners should expect licensing to be a prerequisite for operating the business.

As with federal requirements, businesses that sell products or services regulated by the laws of that specific state will require a state license or permit. This includes hair salons and cosmetology centers, private investigators, security guards, account firms, real estate agents, medical providers, building contractors, and auctioneers.

A business that is required to collect sales tax from customers may be required to register with and be certified by the state as well.

Local Licensing Requirements

Your county or municipality may also require a license or permit for your business. You may have to register your trade name with your county and take care of this first before you apply for any type of state registration. Local business licenses as well as local business permits are usually simple to obtain and low in cost.


Visit your state, county, or city website to find out what’s required in your location. You should at least be able to find contact information so you can request further guidance.

Claiming a Tax Deduction for the Cost

The cost of obtaining and renewing required licenses and permits for your business is tax-deductible at the federal level as a "Section 197 Intangible" expense, but you must amortize the expense over 180 months (15 years). This can be a complicated process, so your best bet is to consult with a tax professional to be sure you get it right. Also make sure you take advantage of every other business-related deduction available to you.

Frequently Asked Questions (FAQs)

How do you get a business license?

Getting a license or permit for your business depends on the type of license or permit that's required. The process can be more or less complex depending on the nature of your business and whether it's regulated by the state or federal government. Search your state's website for guidance. You can often register online.

How long does it take to get a business license?

The process and the time it takes depends on your location and the type of business you run. It can be a matter of days or as long as a few weeks or months.The Delaware Division of Revenue says it can be accomplished within a month of registration.

Updated by Beverly Bird
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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “Apply for an Employer Identification Number (EIN) Online.”

  2. U.S. Small Business Administration. “Apply for Licenses and Permits.”

  3. U.S. Small Business Administration. “State Licenses and Permits.”

  4. State of New Jersey Division of Taxation. "Who Is a Vendor?"

  5. IRS. “Publication 535, Business Expenses.”

  6. “Business License FAQs.”

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